The Azucena Take: Consumer Sentiment and Investment Real Estate

Several articles have been published recently about declining demands for apartments. They all have placed the blame on the rising cost of rent. However, this theory is flawed, and it only takes reading an "Intro to Economics" textbook to realize that. The trend has a logical explanation, which can be found in the data.

The decline in demand is primarily due to the drop in household formations since June 2022. This data is crucial to monitor as it affects all investment properties. The reason for this trend lies in consumer sentiment.

Here is a breakdown of the current consumer sentiment and how it will impact the investment real estate market.

Current Consumer Sentiment 

The Consumer Sentiment Index, a report conducted by the University of Michigan, showed that consumer sentiment hit its lowest point in June 2022, dropping to 50 BPS for the first time. As of the beginning of 2023, it has since risen to 67 BPS.

The cause of this decline in consumer sentiment can be attributed to inflation. Historically, periods of high inflation have always resulted in a drop in the Consumer Sentiment Index. Although this current inflation crisis is not the worst in America's history, it has still presented challenges for households. However, as inflation begins to decline, consumer sentiment has started to rise.

In addition to declining inflation, other factors that could boost consumer sentiment include a more dovish approach by the Federal Reserve towards interest rates and the American economy overcoming its recession mindset.

Impact on Investment Real Estate

Low consumer sentiment leads to limited spending, resulting in a decline in big purchases such as appliances and furniture. This trend affects the need for industrial and retail space and also impacts the hospitality industry. Conversely, when consumer sentiment is high, there is an increase in demand for retail, industrial, and hotel space.

What it Means for Investors

Rather than being concerned about current market conditions, smart investors should focus on what may happen later in the year. According to analysts, consumer sentiment is expected to reach an ideal level between late 2023 and early 2024. It is therefore essential to consult with an expert and position oneself favorably.

The Azucena Take provides an inside look into the investment real estate market using the research done and data collected by Marcus & Millichap