Many factors are driving shifts in the real estate market: inflation and a subsiding US economy, post-pandemic jitters, and trends in the way Americans are using real estate. We are seeing a correction from two years of explosive economic growth, the effects of widespread remote work, solid demand for new housing options, and younger generations purchasing more affordable housing in rural and suburban areas. People are moving to the sunbelt. Commercial real estate properties are vacant or being repurposed to residential space as work habits change. And, the offices that are left occupied are competing with newer, more collaborative spaces. Combine these dramatic changes with higher interest rates and we have a forecast for storm clouds—or opportunities
The real estate market has cooled but is still a good investment. Projections of mild recession and short recovery, shifting demand, and market conditions in 2023 offer novel opportunities to invest in real estate. We also see encouraging tailwinds for real estate investors who want to wait for better economic conditions. These shifts and the economy are difficult adjustments, but this correction provides “strong opportunities for investors to reposition for growth.”
As many have said, the key to the economy in 2023 is whether the Fed can get inflation under control. As interest rates vary, so does the real estate market, one of the first to react to central bank monetary policy. If inflation is wrestled into a manageable state, real estate conditions may improve, and homebuyers may be tempted back to the market. However, investors are still buying.
The largest banks in the country are predicting a mild recession and a positive rebound from tighter economic conditions in late 2023 and early 2024. Demand for housing and apartments, single-family and multifamily, is still strong, despite low supply and high prices. Demand for commercial space will continue to be low, with increased competition for more modern properties that are environmentally conscious and include collaborative spaces. Industrial real estate has been in high demand due to the rise of e-commerce and strong retail activity.
The National Association of REALTORS® (NAR) predicts a cooler real estate market will slowly bring homebuyers back to the market toward the end of the year, says Lawrence Yun, chief economist at NAR. Rising rates may spook small investors, but large investors with access to capital may take the opportunity to purchase at declining home values. Higher interest rates are reducing competition as homebuyers wait, opening opportunities for investors to pick up investment properties at a better deal. A growing number of investors are turning to more passive options, like managed real estate funds and REITs. These conditions create “tough sledding but great opportunity for the same reasons,” says Spencer Levy, a global strategist and economic advisor at CBRE.
Recent legislation like the Investment Reduction Act and Infrastructure Investment and Jobs Act are injecting massive federal funding into transportation and infrastructure improvements, to which real estate development opportunities often follow. The federal investment will spur urban development as projects transform and rebuild city infrastructure. Subsidies and incentives from cities are encouraging developers to retool vacant central business districts into new types of uses, like data centers, residential development, and affordable housing.
Despite occupants’ new patterns and the downturn in the economy in 2022, real estate investors see a silver lining—this lull is a good time to reposition, reevaluate strategy, and prepare for the next upturn. Whether expanding, investing, or moving more conservatively, we’ve reached a point where shifting gears is a critical step from the explosive activity of the past two years. In fact, we may be entering “the best real estate market opportunity since 2008,” says billionaire investor Grant Cardone, who says he “is an aggressive buyer of income-producing properties.” And NAIOP, the commercial real estate development association, sees plenty of opportunities for investors with access to capital. A short decline in activity can be a good time to evaluate tenant expectations and take advantage of novel opportunities.
Of course, a 1031 exchange can help an investor to diversify their investment real estate portfolio and adapt their 2023 strategy to the changing climate. A Section 1031 like-kind exchange creates mobility between one type of property and another, making it an important tool for real estate investors. To
meet with a 1031 CORP. Exchange Officer to discuss your real estate investment objectives, please call
us at (800) 828-1031 or email our Exchange Team.