Just Released: Viewpoint 2023 Jan 4, 2023

Navigate Uncertainty in the Year Ahead with Insights from Integra's Newly Released Viewpoint 2023 Commercial Real Estate Trends Report

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30th Edition of Annual Report Examines Economic Trends and Outlook for U.S. Property Sectors, Including Senior and Manufactured Housing, Build-to-Rent, and Golf Courses

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 DENVER, CO — (Jan. 4, 2023) — Commercial real estate investors that have battled a choppy market in 2022 face more uncertainty ahead in 2023. One of the hallmarks of the current environment is an extreme divergence of opinions across the spectrum on everything from a looming recession and inflation to the Fed’s rate-hiking policy that is constraining liquidity. Integra Realty Resources’ (IRR) newly released Viewpoint 2023 aims to bring more clarity to current market conditions and trends by looking at what the data is saying and pushing past “fuzzy metrics” that may be clouding perspectives.

What’s ahead for 2023? It’s clearly a tough question in the current environment. Views range from doomsday scenarios of a global financial crisis to guarded optimism of a soft landing and mild recession in 2023. “The silver lining is that while imprudent capital may be destroyed in the wake of uncertainty in the short-term, there will be many new opportunities that will arise from this dislocation,” says Anthony M. Graziano, CEO of Integra Realty Resources.

IRR’s team of nearly 600 valuation advisors throughout the U.S. and Caribbean is continuously monitoring the economy and real estate market. The 30th edition of the annual Viewpoint report dissects key economic conditions and secular trends likely to impact property performance and valuations in the coming year. “In order to best serve our clients, we believe it’s important for us to understand and articulate changes occurring in the mindset of buyers and sellers, investors and financiers, and other market makers,” says Graziano.

Viewpoint 2023 was produced in partnership with well-known veteran economist, Hugh F. Kelly, PhD, CRE, who added, "While the U.S. economy is projected to remain stable in 2023 despite a range of economic challenges, there are clear signs of slowing in the labor market, with the Federal Reserve forecasting an increase in unemployment. The housing market is also facing difficulties, with high home prices and a decline in existing home sales. These factors, along with ongoing inflation and rising interest rates, suggest that investors should be cautious as we move into 2023 and consider defensive REIT sectors as a way to mitigate risk in an uncertain capital market environment."  

IRR Viewpoint 2023 Highlights 

2023 National Themes
 

The Economy: Despite a multitude of headwinds that include inflation, rising interest rates, war in Ukraine, and lingering effects of COVID-19, the U.S. economy remains firmly “middle of the pack” among global economic forecasts for 2023. GDP is expected to hold in slightly positive territory, while inflation is likely to drop below 4% by year-end.

Employment: The jobs market has proved to be resilient for much of 2022 with 5.3 million new jobs added in the twelve months ending in October. However, data is showing deceleration in the labor market. In particular, declines in FIRE and Professional/Business Services job growth are especially concerning for the office sector. Overall, the Fed is forecasting that unemployment will climb to 4.4% in 2023 and remain at that level in 2024.

Housing: The ripple effects of housing deflation are likely to spread broadly across the economy in 2023. While home prices remain elevated, the National Association of Realtors (NAR) reported that Existing Home Sales in August 2022 were down 19.9% from the same month in 2021. NAR’s Affordability Index, meanwhile, slipped from 146.5 in July 2021 to 102.2 in July 2022, as household incomes failed to keep pace with home prices.

Interest rates: Fed policy has brought harsh reality to the long run of historically low rates. The key question is where will rates settle on the other side of the Fed’s anti-inflation strategy in 2024 or 2025. The answer, in all probability, is NOT back to the pre-pandemic level. In a sustainable inflationary world, Treasury notes should yield a premium of a percent or so above consumer inflation – or roughly 3.0% to 3.5%. Private market lending rates will likely require a further premium of 250 – 400 basis points, depending on the riskiness of the assets.

Capital Markets: 2022 was a tough year for major equity indexes across the board. Real estate was not spared, but a closer look reveals some reason for greater optimism going into 2023. Investors could be attracted to REIT sectors that show defensive strength against a looming recession, such as self-storage and retail that caters to value-conscious shoppers. Despite caution in CMBS, both delinquency rates and entry into special servicing have come down from their pandemic peaks.

U.S Property Markets

Office:

• Occupancy across the country runs the gamut with large numbers of markets having extremely high or low rates compared to the average of 18.5%, according to Moody’s Analytics.
• While leases-in-place provide office owners with reasonably reliable levels of income, virtually no region of the country has seen office buildings appreciate in value to any significant degree in the 12 months ending September 2022.
• A “flight to quality” is evident. Current metrics favor Class A offices over Class B buildings: rents are higher, vacancy is lower, and cap rates are more favorable.
• Outlook: In an era where “normal” is tough to come by, market professionals have a great opportunity to be selective across the range of possible deals.

Multifamily:

• Multifamily is approaching 2023 with concerns about an inflection point where the stellar results enjoyed in recent years come back to earth.
• Although rising mortgage rates will create barriers for home ownership, renter demand is expected to soften in the face of a potential recession and decelerating employment.
• Owners face increased supply pressures, particularly in suburb-dominated metros with ample land at their perimeters that have experienced robust new construction.
• Outlook: Multifamily cap rates appear headed for an inevitable rise, with negative effects on transaction flows and prices in 2023.

Retail:

• IRR’s Retail Market Cycle Chart shows 38 of 61 markets in recovery or expansion versus 23 in hyper supply or recession mode, suggesting positive rotation in the sector.
• However, cap rates, market rents, and vacancy rates have moved, for the most part, only in single-digit basis points, suggesting stagnation rather than an advance for retail.
• Malls seem to be bottoming out, and many top malls have deep-pocket ownership that can carry through an expected moderate recession in 2023.
• Outlook: Positive and negative forces are at work in the retail property sector, and macroeconomic conditions are expected to present cyclical risks in the coming year.

Industrial:

• Despite signs of slowing, industrial still has unmistakable strength. Integra’s industrial Market Cycle Chart for 2023 skews heavily positive, with 50 of 61 markets rated in the expansion phase.
• As of Q4, rents were up nearly 9% year-over-year, with vacancy down to nearly 4% for warehouse/distribution properties and flex space somewhat higher at 5.9%.
• Potential market risks include downsizing from major players, such as Amazon, HP, Cisco, and Intel, among others.
• Outlook: There is plenty of energy propelling the industrial real estate sector into mid-decade, and economic resilience and innovation continue to drive optimism for industrial properties in the coming year.

Hospitality:

• The hotel industry is highly volatile, with revenue needing to be refreshed on a nightly basis.
• The COVID-19 pandemic devastated the hotel sector, but its steep decline set-up a strong rebound for the sector in 2022.
• As of the summer of 2022, travel demand has returned and is stressing airline capacity, while gas prices have risen by only 7.7% year-over-year.
• The outlook for the travel industry is uncertain due to potential recessions and inflation, which could impact discretionary spending.

Specialty Property Reports

Healthcare & Senior Housing: The level of fear experienced in the earlier stages of the COVID-19 outbreak subsided and occupancy and revenues are generally returning to pre-pandemic levels. However, higher wage costs continue to depress NOI margins and higher interest rates will also put pressure on values.

Manufactured Housing: Manufactured housing is responding to rising demand from consumers seeking affordable options, and investors are taking notice. Occupancy rates have risen, reaching 93.8%, and sales velocity also has increased. The industry outlook is positive, with occupancy and site rents expected to continue to climb in 2023.

Build-to-Rent (BTR): The BTR community offers a desirable alternative to traditional multifamily properties and is expected to continue to see growth in the coming years. An estimated 22 million people now live in manufactured homes in the U.S. As millennials grow into life stages that require the space and benefits provided by single-family homes, demand for BTR communities is projected to significantly increase.

Golf Courses: The golf industry has seen a significant increase in rounds played over the past two years. This growth has led to an improvement in the financial health of both public and private courses, with many membership clubs reaching capacity and experiencing an increase in membership dues, green fees and revenue. Despite challenges such as rising interest rates, the industry's future looks bright due to continued growth and the development of alternative golf-centric outlets.