All things considered, 2022 has been a good year for real estate property. S&P Global estimates that transaction volumes will total $800 billion, with the industrial, retail, and multifamily asset classes driving activity.
This year also saw less established property types like cold storage, data center, and life sciences become more attractive to investors. However, the sector cooled off considerably once the summer ended, much like the weather. The U.S. economy has become increasingly unstable in recent months, which unnerved financiers and dampened consumer purchasing enthusiasm.
The uncertainty of the marketplace has made long-term real estate visibility increasingly murky, but it’s still possible to forecast the progression of some recent industry movements. Here’s a look at the biggest trends that will shape the real estate sector in 2023.
Fear, Uncertainty, and Doubt
It has been eleven months into 2022, economists still can’t agree on whether or not the U.S. is technically in a recession. While this debate continues, most people do think that the current economic uncertainty is negatively affecting different parts of the economy – like the real estate sector.
Because of this, a lot of leaders in the real estate industry believe that the financial performance of commercial real estate will suffer in 2023. A recent survey of 450 executives by Deloitte found that sustained high inflation will have a negative impact on earnings.
This is in line with the prediction by ULI Real Estate Economic Forecast that commercial real estate transaction volume in America will decline from $846 billion in 2021 to $735 billion in 2023. Additionally, the outlook from ULI Real Estate Economic Forecast anticipates that America’s GDP growth will decline by 0.9% in 2023, which is consistent with the view that a recession will occur sometime next year.
J.P. Morgan Chase has noted that a recession may be on the horizon and that demand for assets could fall in the near future. If capital for real estate becomes more expensive, mortgaging and refinancing activity will likely slow down. The Mortgage Brokerage Association has said that this change could reduce financing options within the segment by 18% by the end of 2020.
While the housing market crash has left many people reeling, there are still opportunities to be had – especially for those who are looking to rent rather than buy. J.P. Morgan anticipates that the rise in prices of single-family residences (by 43.7% in the last two years) will cause prospective homeowners to rethink their options and look into renting instead. This drop in home buying interest, coupled with the undersupply of houses in America, could create a demand for multifamily rental properties.
Return-To-Office
Social distancing has been a major trend over the past few years, with many businesses worldwide transitioning their workforces to function remotely. However, a new trend has kicked off to bring employees back to the office. The data indicates that this movement will gain momentum in 2023, which will have a meaningful impact on the office building segment.
Two of the world’s biggest banks, Goldman Sachs and J.P. Morgan Chase, have recently recalled their employees back to physical workplaces. The financial services giants did this partly to protect their cultures; Goldman’s leadership believes that apprenticeship in-house is key to its past and future success, and J.P. Morgan’s chief executive believes that remote work decreases productivity and idea generation.
It’s not just New York City’s financial sector that feels this way – CEOs from plenty of large corporations across different industries want their employees back in the office. East Coast office building tenants have also started to express more interest in having their workers operate on-site this year.
Even though many employees in the U.S. are still planning to work remotely or on a hybrid schedule, if the return to the office trend emerges in 2021, it probably won’t have gained much traction outside of just one region. With inflation and unemployment rates on the rise, workers are more likely to be willing to accommodate employers. So as a result, the demand for office space is expected to intensify in 2023.
Sustainable Development
The Inflation Reduction Act was signed into law this summer by the Biden administration and it contains some pretty big implications for the real estate sector, especially when it comes to environmentally friendly building projects.
The IRA offers multiple incentives to stimulate these types of projects in the U.S. in order to help reduce the significant contributions that the real estate sector makes to the country’s overall carbon dioxide emissions. With the current state of the economy and the trend of people returning to offices, green building development is expected to become a prominent trend in 2023.
The IRA’s tax credits can make renovation and ground-up projects financially viable. The new law also supports less capital-intensive green measures like using sustainable building materials and connected HVAC systems that use less energy. Inflation is making the entire development process more expensive, buteco-friendly policies give developers a way to regain some control of their budgets.
Key Takeaway
It’s no secret that the economy has been taking some hits lately, and different industries are starting to feel the effects – including real estate property. However, a new trend is beginning to emerge as employees start to return back to the office. The data suggests that this movement will begin to pick up speed in 2023, which will have a significant impact on the office building market.
