Emerging Trends in Real Estate, 2023 Edition
By: Charles Sells
Staying on top of industry news and changes is vital for our success as real estate investors. It is easy to lose sight of the forest because we become focused on the trees. We see changes in our local real estate markets at the level of neighborhood, town, and city. However, it’s important to also take a step back and look at the bigger picture, the context of the national and global economy.
PwC’s annual publication, Emerging Trends in Real Estate is always a good read. PwC and the Urban Land Institute just published the 2023 edition of this report, which draws from interviews and survey responses from a range of real estate industry insiders. As in previous years, the report sums up the major trends we're likely to see in the coming year.
There is a lot to unpack in it, but for this article, I’ll highlight some things that stood out for me as it relates to residential real estate.
Getting Back to The Basics
The big take-home message, and the overarching trend highlighted in the report, is that now is the time to switch from short-term to long-term thinking. Since 2010, when home sales and prices reached their lowest point, until 2022 when the Fed finally started hiking interest rates, there has been a great 12-year run! Of course, there have been intermittent disruptions between 2010 and 2022 (notably the pandemic that hit in 2020), but generally, markets rose, prices rose, and real estate was a booming business.
Now that we are edging towards a recession, the (relatively) quick and easy profits of previous years are starting to dissipate. While home prices are unlikely to crash dramatically, things are cooling down. In the words of the report, we are entering a period where markets are normalizing.
But What Is Normal?
If the residential real estate market is normalizing, the report also emphasizes that normal has changed. The pandemic that we have lived through in the past few years has changed everything about normal. For example, there has been a trend of people moving out of crowded cities to smaller towns, especially as more people work from home rather than commute to offices. The pandemic has disrupted how people view and value their homes and where and how they want to live. Homes are becoming multipurpose spaces where we live, work, and shop (instead of these activities taking place in separate single-purpose spaces).
Some of the trends that emerged in the pandemic look set to remain with us for the foreseeable future. In short, we are not going “back” to normal, rather we are moving forward to a new normal. The homes that buyers and renters want are changing, and developers and investors must adapt. How this plays out in our local residential real estate markets has to be evaluated locally.
Rising Interest Rates And Investment Flows
One of the immediate effects of rising interest rates in the second half of 2022 has been, in many markets, the decline in transaction volumes. As investors, rising interest rates are unsettling and are causing many to adopt a watch-and-wait strategy. At the same time, the cost of capital is rising, and it is becoming harder to come by. Some investors may exit the game, others may choose to sit out this playing period, and others will proceed with greater caution. The good news for some is that the bidding wars will calm down, and cash will once again become king.
In 2023 we need to adopt a longer-term view of things. Invest in properties with strong underlying fundamentals that will bring consistent (if not exciting) returns. The best quotable quote from the report comes from the CEO of an investment management firm who stated, “The short-term risks are real, and I’m not making light of any of them. But if you have the long view, I don’t think it’s time to panic.”
Be sure to download the full report here, it’s an informative read!