Newsletter – January 2023
2022 was an interesting year in the world of real estate investments and overall economic conditions. With rising interest rates, growing inflation, and increases in the consumer price index, the real estate investment market was a rollercoaster of opportunity. Each of these data points creates a narrative for the year that is easily traceable and foreshadows the kind of year to come in 2023.
In early 2022, there were reports that the Federal Reserve Bank would be raising the prime rate to combat high inflation. The schedule proposed by the Fed would have the rate increasing by over 200 BPS in 2022 alone. The speed at which the rate was to be increased is what had people worried. If you needed a loan, it was 4% now or 6%+ later in the year. This proved to be extremely beneficial to the Real Estate market. The first and second quarters of 2022 saw $192B and $257B in sales volume respectively, nationwide across all product types. Both quarters represent a higher transaction volume than the previous year in its entirety. This high sales volume directly correlates to the start of the interest rate hikes and the increases in inflation. Investors generally wanted to shield their resources from inflation at lower interest rates. Real Estate has always been a good inflation protection asset.
Figure 1 – Sales Volume – Data Sources: Figure 1 – CoStar Realty Information Inc.
n Q4 2022, there was roughly $156B in sale volume in the whole of the USA. Considering the numbers in 2022, this is a huge drop in transaction volume. But if we look at years prior in commercial real estate, we see that this quarter alone would be considered a strong year in any of the last 10 years. As the chart above demonstrates, however, this has still been a better fourth quarter than in Q4 2021 by over $148B. This quarter has been bleak in most commercial real estate markets, but it is all a matter of perspective. Deals probably wouldn’t have fallen through as they did in the last two quarters if it weren’t for the public’s perspective on the massive amount that the government inflated the dollar in 2022 as shown in Figure 2.
Figure 2 – US Inflation 2022 – Data Sources: Figure 2 – U.S. Bureau of Labor Statistics
With inflation over 9% at its height in 2022, the cost of living has spiked, and the markets have been at their lowest points. Even inflation-protected investments like real estate are suffering, and pretty much all economic sectors look bleak. However, it is in times like these that the greatest opportunity exists. Any investor who wishes they could go back to 2009 and take advantage of the world of opportunity created by the crash in 2008 should recognize that now is the time to be aware of opportunity. With real estate suffering like it is, prices should respond in kind. While we don’t forecast drastic price reductions yet, it is only a matter of time before prices soften. Sellers must move their dormant product before lenders force the same, and buyers will soon be holding most of the negotiating power. Stay vigilant for the certainty of supply and demand and seize the opportunity that is given in difficult times. It may get worse before it gets better, but commercial real estate will continue to perform well in the future.