5 Challenges Facing the Investment Real Estate Market (2023)
2023 has proven to be a challenging year for the investment real estate market. With factors such as inflation, increasing interest rates, and bank failures, shockwaves have reverberated through the industry. As we reach the halfway point of the year, a clearer picture emerges regarding the challenges faced by investors. It is likely that you, as an investor, have encountered and had to overcome one or more of these obstacles, or perhaps they have hindered your progress.
An investor should be aware of the obstacles in the market so they can better be prepared.
Challenges Facing the Investment Real Estate Market
Interest Rates: Over the past 15 months, the market has witnessed unprecedented and aggressive interest rate hikes. Rates have surged from historically low levels to reach pre-2008 levels. While this may seem evident, it serves as the underlying factor behind the various challenges investors are currently confronting in 2023.
Cost of Debt Capital: In 2021, investors were able to secure loans with interest rates below 3%. However, as of June 2023, the same loan could now carry interest rates ranging from 5% to 8%. Several factors will influence the specific rate - such as property type, location, leverage, and loan term.
Distress Risk: Certain properties may face the challenge of being pushed into a negative cash flow position. This situation may require investors to inject additional capital into the property to maintain its financial viability. Consequently, as these loans mature, investors may be compelled to sell underperforming assets in order to manage their portfolio effectively.
Capital Moving to Bonds: Investment real estate is currently facing stiff competition from Treasury Bonds due to prevailing interest rates. The attractiveness of investing in Treasury Bonds, CDs, and other safe investment options has significantly increased. Importantly, these investments are perceived as having minimal risk when compared to investment real estate.
Tighter Lender Underwriting: Despite the abundance of available capital, banks have been adopting stricter lending practices, particularly among mid-sized banks. The prevailing economic climate has led banks to prioritize building up their reserves and adopting a more cautious approach to lending.
What to Expect Going Forward
A potential silver lining amidst these challenges is the likelihood of investors encountering reduced prices for newly available assets in the market. Sellers may need to make adjustments to their prices to attract potential investors. However, it is important to note that a significant wave of foreclosures is unlikely. While certain assets may carry some level of risk, they are not considered to be in a vulnerable position.
Investor confidence going forward hinges on the stabilization of interest rates. Fortunately, there have been signs of this occurring as the Federal Reserve has temporarily halted interest rate hikes. If this trend persists, it is expected to instill greater confidence among investors regarding the market's stability.
The key takeaway is that investors are going to face a series of challenges going forward. However, they will not be alone as market experts will have a plan based on an investor's situation and goals.
The Azucena Take provides an inside look into the investment real estate market using the research done by Marcus & Millichap.