The Real Estate Capital Scoreboard® – January, 2023

January 1, 2023 – Last year shocked the real estate capital markets based on unforeseen global events.   As the Covid pandemic subsided, the unprovoked Russian invasion of Ukraine created chaos in worldwide energy and food markets.  As a result, inflation reached generational highs forcing the Fed to more than double interest rates.

The new year brings more uncertainty.  Recessionary conditions dampen investors’ appetites for aggressively buying commercial real estate assets.  For the most part, too wide of a gap exists between buyers’ and sellers’ expectations, as debt pricing uncertainly limits demand for new acquisitions.  Yet despite this uncertain outlook, 2023 may be a year of tremendous opportunities, including:

Manufacturing Miracles:  Too much reliance on overseas products, control over sensitive technologies,  and erratic supply chain issues helped spark the revival of domestic manufacturing.  Today’s automated assembly processes rely more on a local skilled workforce vs. lower-cost foreign labor – partially negating the cost savings of non-American production.  Expect more industrial and manufacturing facilities to be built in the foreseeable future and strong investor demand for this asset class.

Bed Buys:  Apartments, student housing, selective lodging, and other properties with beds remain financial strongholds.  Post-pandemic travel demand, supply shortages of affordable housing, and costly mortgages help boost prospects for these sectors’ continued strong financial performance.

Retail Revival:  Even as e-commerce enjoys tremendous success, more shoppers return to the malls for recreational and fashion merchandise.  Furthermore, necessary visits for food and personal care services offered by neighborhood centers remain vital, especially in densely populated areas.  Lastly, outdated retail centers remain strong targets for repurposing into alternative uses, including healthcare, residential redevelopment, and surplus parking.

Calmer Capital Markets:   The narrowing yield curve inversion and other key financial market indicators indicate recessionary conditions are easing.  Despite higher short-term borrowing rates, long-term investors seem to be betting on tamed inflation, as the Fed’s actions demonstrate a strong resolve to control inflationary pressures.   Thus, mortgage rates should stay controlled, helping realty investors and stabilizing the housing market.

White Swan:  Just as unforeseen “black swan” events create negative unpredictable capital market conditions (e.g., COVID), some predictable “white swan” events may create positive conditions to bolster real estate investing (e.g., an early end to the war in Ukraine makes lower interest rates).

The Real Estate Capital Institute’s® director, John Oharenko, predicts, “While many investors worry about Fed actions and domestic/global issues influencing realty transactions, astute players seek mispriced assets based on expecting more favorable conditions for 2023.”

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