Declining Prices in the Investment Real Estate Market (2023)
In late 2021, the economy experienced a significant boom as the vaccine became available and commerce reopened. Easy access to capital, coupled with pent-up finances, enabled investors to expand their portfolios. This surge in demand resulted in a considerable increase in the value of most properties.
By mid-2023, the investment real estate market has witnessed a shift in dynamics. Prices are beginning to decline and investors are unwilling to pay a premium for a property. This prompts us to examine the factors behind these changes. Let's delve into the significant transformations that have taken place in the investment real estate market and explore the driving forces at play.
Price Changes 2023
Challenges of Evaluating Price Changes
Apartment: -12.5%
Retail: -7.4%
Office - CBD: -6.9%
Office - Suburbs: -8.1%
Industrial: -2.3%
Examining price changes in the investment real estate market is not easy due to a number of factors. A significant challenge comes from the notable variations observed across different regions down to the sub-markets within a city or county. Even when comparing two seemingly identical properties within the same sub-market, numerous factors come into play that can influence the relative value of each property.
Factors at Work
Interest Rates: The primary factor contributing to declining prices has been the impact of interest rates. Between April 2022 and May 2023, the Federal Reserve implemented one of the most aggressive rate hikes in history. As a result, acquiring capital has become increasingly challenging, making it harder to sell properties with high appraisals. Brokers and sellers who recognize this have had to make necessary price adjustments to align with market demand. Conversely, those who still perceive the market as being as vibrant as it was in late 2021 to early 2022 are encountering difficulties in finding potential buyers.
Recession Risks: The current economic situation presents a potential risk of a recession or we are already in one. Regardless of personal sentiments, these circumstances are often sufficient to deter major investments until the market stabilizes. Investors are understandably concerned that a recession could negatively impact their financial well-being or limit potential opportunities within the market.
Flagging Consumer Sentiment: In addition to the risk of recession, consumer sentiment has also been a contributing factor. Despite overall high confidence levels, the impact of recent layoffs has caused many to postpone major purchases. This cautious approach stems from concerns about personal financial stability and the potential repercussions of economic uncertainty.
What to do in the Current Market?
Going forward, investors should take necessary steps to ensure the success of their portfolio. One should carefully examine their underperforming assets to determine whether it is more advantageous to sell them or hold on until the market improves. Conversely, buyers should make sure their financing is in order and have a backup plan in place. It is crucial for both buyers and sellers to seek guidance from an advisor who possesses a comprehensive understanding of the market.
The Azucena Take provides an inside look into the investment real estate market using the research done by Marcus & Millichap.