In today’s uncertain economic climate, we can’t escape headlines of inflation and talk of a possible recession looming. After a global pandemic and the havoc it wrought on every aspect of our personal and professional lives, we’re still collectively striving to right the ship.
However, the news is not all doom and gloom for real estate investors: Opportunities abound, if you know where to look and where to strategically put your money. Some experts are even predicting the arrival of that much hoped-for “soft landing” for the American economy in the months ahead.
In one shining example of market optimism, Goldman Sachs is forecasting the United States’ chances of entering a recession in the next year at just 35% and predicts interest rates will hold steady, per the investment bank’s research report examining the macro outlook for 2023.
Goldman surmises that this U.S. economic cycle is different from any other we’ve experienced, largely because the labor market is being driven by significant job openings as opposed to excessive employment. It also cites the normalization of the supply chain and rental housing, which it said is a unique source of disinflation not present in past cycles.
In further good news for the commercial real estate industry in particular, many CRE pros foresee a recession to hit the U.S. economy in the coming months — but they think it will be “short and shallow," according to the Urban Land Institute and PwC’s recent 2023 Emerging Trends in Real Estate report.
A (Cautious) Sense of Optimism
The top line: The overall economy remains for the most part sound, particularly when compared to the Great Recession of 2008.
Higher interest rates are no doubt causing concern to investors and consumers alike, but the economy has been able to handle them better than anyone thought possible just six months ago.
The consistently steady jobs market has helped put many of those fears to rest. The labor market has remained resilient enough to buy time for supply chains to regain their footing and for many of the pandemic-related problems to ease. That’s providing a clearer path for the Fed to target inflation.
While inflation is an ongoing concern, the future has some bright spots. Kiplinger’s forecast showed that while inflation is expected to be at 8% by the end of 2022, it is predicted to fall to 3.5% by the end of next year.
Real Estate’s Lasting Legacy
Real estate has long been considered one of the most stable long-term investments — even in an era of volatility. Because the value of properties typically only heads in one direction — up — real estate investing insulates your portfolio against the vagaries of inflation.
The consensus amongst real estate investment experts is that significant headwinds are on the horizon, meaning that investors with a healthy appetite for risk can capitalize on current conditions. Certain CRE classes, such as multifamily, retail, and industrial, remain strong, with vacancy rates mostly declining on a year-over-year and quarter-to-quarter basis, robust rent growth, and positive excess demand.
REITs have also proven to be safe havens in these tumultuous times, in particular lodging/resort and retail (driven by the steadfastness of regional malls) REITS have performed surprisingly well.
A Shifting Strategy
Societal shifts such as the remote and hybrid work movement and changing demographics and consumer preferences have affected what asset classes fare better than others. However, with challenges come opportunities. And investors with the vision and the patience to stay proactive, innovative, and adaptable will come out on top in the next phase of our economic cycle.
For example, while the return-to-work discussion usually centers on the pervasive issues of getting people back to the office, the conversation should center on finding authentic and sustainable solutions for the future of work.
Relatedly, the retail and housing markets are in a period of transformation as the very ways that people live evolve. Over the last two decades, those who have understood this evolution and not run away from it have experienced success.
Additional real estate trends to watch now include:
The flight to quality: The move to hybrid work has not been a negative to Class A commercial, amenity-rich properties. Buildings with such desirable features as green spaces, concierge services, and on-site maintenance are still attracting higher occupancy levels. Class B and C spaces potentially present an opportunity for savvy real estate investors to take advantage of this shift, if the price is right and the projects appealing.
Thinking outside the box: Considering the lifespan of a property is paramount to longevity. In this era of rethinking everything, giving old spaces new life — such as converting office space to affordable housing and retail into entertainment venues — give structures a new lease of life. These adaptive reuse projects also contribute to sustainability initiatives that are increasingly important to securing funding.
Mixed-use and multifamily: Mixed-use spaces, with any combination of multifamily, retail, and office can be mutually beneficial for all the businesses that call them home. Of the three sectors, multifamily has consistently shown the greatest resilience. In Q3, that was marked by an influx of tenants moving back to urban regions, as well as rising rent prices.
Future Proofing Your Portfolio
As we round out 2022 and look ahead to the new year, we’re witnessing more partnerships and joint ventures on the horizon as investors look to team up to help each other navigate uncharted territory. Whether you’re an investor exploring economic opportunities, a real estate company seeking capital from the widest variety of sources available, or an emerging PropTech company looking to market your services to a knowledgeable, actionable audience, look to Capital Connect to help expand your network exponentially.
Our dynamic database-driven platform is a robust real estate marketing solution that connects real estate professionals and maximizes marketing initiatives. You’ll have unprecedented access to real estate investment companies, private equity firms, REITS, and commercial and residential lenders so you can raise capital faster and more efficiently, plus the power of a full suite of email marketing, analytics, client relationship management and lead management tools that will position your organization to be at the forefront of an ever-evolving industry.