3 Real Estate Trends to Watch in 2023
This week, we're carving out a little bit of space for the real estate aficionados on our list.
Do you manage or invest directly in physical buildings? Invest via crowdfunding? Heck, do you own a few real estate investment trusts (REITs) in your brokerage or IRA? Are you considering doing any of the above sometime in the near future? If so, read on as we look at a few of the major drivers expected to impact real estate in 2023.
The Tea
2023 is peppered with question marks from virtually every economic angle, and the real estate world is no different. The direction of inflation and interest rates, as well as the possibility of recession, loom over every decision about to be made by landlords and property managers across the country.
We wish we had a crystal ball able to divine how any of those factors would pan out this year. Alas, there's not—and if there was, we'd have asked it for winning Powerball numbers years ago. (C'mon. You would have, too.)
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But you're hardly defenseless. With a little bit of knowledge, you can better understand what might be coming down the pike, how it could affect your property operations and profitability, and how you can pivot to take advantage of (or protect yourself from) shifting economic winds.
The Take
We've recently tapped the collective brainpower of real estate brokers, tech providers and analysts to discuss a few of the major themes that could impact landlords, property managers and real estate investors in the coming year. Here's what they had to say.
Recession + Rental Properties
The "R" word is on the tongue of every prognosticator in the financial space. Remember our stock market outlook? All the experts who weighed in, to a person, had something to say about the possibility of a recession.
And it's understandably one of the top subjects for real estate experts to address—though the field isn't universally worried about a recession's potential ripples throughout the rental market.
"Supply and demand largely dictate housing and rental markets," says David Bitton, the CMO and Co-Founder at DoorLoop, a real estate property management software provider. "During a recession, new homes won't be constructed at a rate that will exceed demand. As such, the rental market will not be affected as much because there still won't be enough supply of new homes—this means home prices could remain high, making renting a more practical choice."
Kelleher & Sadowsky Associates, a commercial real estate brokerage and advisory services provider, believes any continuation of rising rates could help landlords, too. "There may be an upside to rising interest rates for multifamily owners and investors, too, as higher interest rates may cause potential homeowners to remain renters for longer," the firm says in its 2023 outlook.
CoStar Group isn't nearly as optimistic.
"As 2022 progressed, economic uncertainty suppressed household formations which limited multifamily demand," says Jay Lybik, CoStar's National Director of Multifamily Analytics. "Consumer confidence started off weak early on with high inflation and the war in Europe, only to be continued by the Fed's interest rate hikes and impending recession fears. With 2023's national forecast predicting the highest new supply totals since the 1980s, expect vacancy to rise above 7% and rent growth to push much lower."
That pain for landlords might not be evenly distributed, however. CoStar says 2023 could be particularly difficult for the Sun Belt region, "with deliveries in many markets projected to reach record level." But supply additions won't be nearly so plentiful in the Northeast and Midwest, making them "best positioned to remain closest to equilibrium."
Technology: Continued Investment Despite Tighter Wallets
Deloitte's 2023 commercial real estate outlook paints an austere picture for technology spending in the real estate space. But a couple specific industries could see more investment from the minority of companies looking to expand their tech budgets—and from companies who are cutting back but trying to get more bang from their remaining buck.
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"Survey respondents foresee a reduction in technology budgets in the near term, given overall economic concerns, including inflation, labor costs, and ongoing supply chain uncertainties," Deloitte says. Less than half of respondents expected any growth in tech budgets for 2023—down from about two-thirds at the start of 2022. The picture is best in North America, and even then, only 48% expect bigger tech spending (27% expect it to be flat, 25% think it will decline).
But property technology (proptech) is one area where spending could grow.
"Respondents from real estate firms of all sizes pointed to increasing outsourcing capabilities to optimize operational capacities," Deloitte says. "Of particular interest are back-office functions, where risk management and internal audit, property management, and tax accounting and reporting were most often cited by survey respondents. Portfolio management and CRE development were also cited as candidates for outsourcing by respondents in large- and midsized companies."
DoorLoop's Bitton also sees demand for proptech tools increasing as landlords and property managers look to simplify tasks and become more time-efficient. "As we continue to embrace remote work in all industries, including rental, property management software and IoT devices will take center stage," he says.
Emerging technologies could continue to expand as well. "Marketing will also involve new tech, such as augmented reality (AR) and 3D modeling, making virtual viewings even more exciting and interactive," Bitton says, adding that landlords and managers will be encouraged to adopt infrastructure and amenities that provide tenants with better security and service.
Deloitte data seems to back that up, too. Among respondents' top target capability for proptechs, "property visualization through augmented and virtual reality (AR/VR) was also near the top of the list, at 33%." No. 1 was process automation, which was identified by more than 43% of respondents.
(Some) Publicly Traded Real Estate Could Thrive
The most frictionless way for people to invest in real estate is through publicly traded real estate investment trusts (REITs), which trade just like stocks and that you can easily buy in brokerage accounts, IRAs and other self-directed investment accounts.
Michael Elliott, Research Analyst at independent research firm CFRA, says in his 2023 REIT outlook that broadly speaking, "fundamentals remain exceptional, with strong underlying growth in both NOI [net operating income] and funds from operations [FFO], as well as healthy balance sheets."
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And CFRA more recently upgraded its view on the space on beliefs that the Federal Reserve is nearing the end of rate hikes, and that the U.S. will not suffer a severe recession.
Historical trends also bode well for publicly traded REITs.
"After one-year periods of public REITs underperforming their private counterparts by 30% or more, public REITs have historically outperformed by an annualized 13.5% in the three years directly thereafter," say Glenmede's Jason Pride, Chief Investment Officer of Private Wealth, and Michael Reynolds, Vice President of Investment Strategy. "The last time such a wide disparity in returns unfolded was in early 2009, after which public REITs more than doubled in value (113.5% return), well outpacing an 18% drop in total returns for private REITs."
Just don't paint REITs with too broad a brush this year.
"While all REITs generally benefit from a macroenvironment that supports strong economic growth and low unemployment, specific sub-industry performance often comes down to more nuanced industry-specific metrics," Elliott says. "As a result, variation in sub-industry performance is often significant."
For instance, CFRA likes industrial REITs, which have remained fundamentally strong despite economic headwinds and could really take off with other cyclical businesses if the U.S. economy rebounds—something CFRA believes could happen during the second half of 2023. But for those who believe economic weakness will linger, healthcare REITs (hospitals, medical office properties, etc.) are a traditional source of defense thanks to persistent healthcare spending growth.
And one of CFRA's least-favorite sub-industries shouldn't come as much of a surprise to anyone familiar with the real estate space: "We view office REITs negatively as new work-from-home trends continue to hamper the industry and have led to worsening performance metrics since the onset of the pandemic," Elliott says.
As always, we hope we've provided you with a little more direction today. Thank you again for reading, and have yourselves a great rest of the weekend!
Riley & Kyle
Young & The Invested
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Editor's note: Doorloop is an affiliate partner with Young & The Invested. By clicking on the link above and making a purchase of their software, Young & The Invested may be entitled to compensation from the company.