The Azucena Take: Investment Real Estate Activity in 2023

What is the current state of investment real estate activity as we enter 2023? Initially, it appears to be less impressive compared to what it was in 2021 or at the beginning of 2022, leading one to believe that the market is slowing down. However, the situation is not that straightforward, and the answer is more complex. 

That is why it helps to understand the history of interest rates, how the market used to be, and what to expect going forward. This will present context into the current state of investment real estate activity. 

The Reality of Intrest Rates

Many will attribute the decline in investment real estate activity to the rising interest rates. Although this may be a contributing factor, it is not the only one. In the past, interest rates at or around 5% were considered normal, but from 2012 to 2021, they ranged from 0.5% to 3%.

The sudden increase in interest rates has been a shock to the investment real estate market. However, it's crucial to recognize that interest rates at current levels have been normal historically. Therefore, the slowdown in investment real estate activity is partially due to investors needing to adjust to the current economic climate.

Needing to adapt isn't just a suggestion, it has been the norm backed by historical data. This breakdown of the data will better explain it:

  • In 2001 there were 6.5K investment real estate transactions

  • It started to rise in 2002 and peaked in 2007

  • In 2007 there were 30K investment real estate transactions

  • It started to decline in 2008 and tanked in 2009

  • In 2009 there were 7K investment real estate transactions

  • Activity started picking up in 2010 and peaked in 2015

  • In 2015 there were 34K investment real estate transactions

  • Activities settled between 2016 to 2019

  • 2020 saw a decline due to the pandemic

  • Transactions peaked at an all time high in 2021  

A Changing Market

While interest rates do play a significant role, they are not the only factor affecting investment real estate activity. The overall composition of investors has also undergone a transformation since 2012. Low interest rates have lowered the barrier of entry, enabling new investors to join the market. This has allowed individual investors to surpass REITs and investment firms as a dominant force in the market.

The advancements and increased availability of information technology have also helped level the playing field. During the early to mid-2010s, numerous services emerged that disrupted the industry by offering real-time data and information about every sector of a market. This allowed investors to make better plans and strategies even for a niche market. As a result, the utilization of these services has led to economic success for many investors.

What it Means for Investors

Normalcy in activity will return, but it requires two events to take place. Firstly, the market needs better clarity on the status of interest rates. Secondly, sellers need to accept the reality and stabilize their prices based on the current market conditions. 

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

Carlos Azucena