Perception and Reality of the Market 2023

Perception and reality are often mistakenly considered to be the same. This is especially true among those who are active in the investment real estate market. Investors' understanding and perception are primarily influenced by their experiences in a particular market, as well as by the headlines they read, which may be misleading.

That is why it's crucial for investors to understand how their market perception compares to the market reality. This requires an investor to not be focused on the headlines but to examine actual market data.

Key Economic Performance Indicators 

It's common to hear people speculate that we are currently in a recession or one is looming. However, these talking points are often based on reactions to market events rather than actual data. The reality is that data provides a much more realistic answer to how the economy is performing.

These are what the key economic performance indicators are showing: 

GDP: In 2022, the GDP rose by 2.1%, and in 2023, it has continued to climb by +1.2%. While small compared to the 6% spike in 2021, they are consistent with the standards seen in previous years. The exception to this is during times of economic downturn and recovery.

Looking at the GDP alone is not enough to go by and one needs to look at other metrics. 

Labor Market: As of March 2023, there are over 25 million job openings. While there have been major layoffs, the first time unemployment claims are at 230K. Meanwhile; unemployment rates have been at 3.5% since 2022 with little changes. 

10-Year Treasury: A factor that is often overlooked is the 10-Year Treasury rates. As of April 2023, they have been hovering around 3.45%. While it seems high compared to the last decade, it's still low compared to the historic norm. 

Asset Performance in 2023

While performance indicators are an important measurment of overall economic health, they do not provide a complete picture of the investment real estate market. Investors should also examine how each property type is performing. Here's a breakdown of how each asset class was performing before the pandemic and how they are performing in 2023:

Apartments: Before the pandemic, the average vacancy rate was 5%. However, in mid-2022, it hit an all-time low of 3%. As of Q1 2023, the vacancy rate has climbed back up to 5.2%. Despite this, rent has continued to grow by 6.4% in 2023.

Multi-Tenant Retail: The average vacancy rate was 5.9% while rent was growing at 2.7% before the pandemic. Since Q1 2023, the vacancy rate was at 5.6% while rent has grown by 5.5%. 

Industrial: The average vacancy rate was 4.9% while rent was growing at 5.8% before the pandemic. Since Q1 2023, the vacancy rate was at 4% while rent has grown by 16.6%. 

Office: This is the only property type that is underperforming. Before the pandemic, the average vacancy rate was 13.1% while rent was growing by 3.1%. Since Q1 2023, the vacancy rate was at 16.8% while rent has grown by 0.7%. 

What it Means for Investors

The key takeaway is that an investor's understanding of only their market and relying on the news creates a perception that is not in line with reality. What one perceives and what reality is are going to be radically different. To make informed decisions, it's best to consult with an expert who understands the market.

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