Written by: Matthew Wolpert, CFA | Neuberger Berman
While macro risks abound, we think 2023 could offer compelling opportunities for long-term real estate investors to provide timely liquidity in a challenging market.
Last year was certainly full of surprises—from rising inflation and interest rates, to geopolitical turmoil and slower GDP growth—and 2023 will likely bring its fair share, too. Yet when uncertainty is high, we believe hard assets like real estate can provide particularly appealing opportunities for discerning investors.
We think some of the current trends driving rates higher could also support long-term real estate values, as inflation boosts rents and costly capital keeps a lid on new supply and increases replacement costs. However, a combination of risks—including limited transaction activity, higher debt costs and a slowing economy—suggests the sailing will unlikely be smooth in the near-term.
In late 2022, year-over-year transaction volumes dropped 37%, 49% and 68% in September, October and November, respectively.1 Less activity generally thwarts price discovery, which can attract fewer bidders and can lead to lower prices. And despite some recent stabilization, debt costs ended 2022 far higher than where they started, with 10 year AAA CMBS spreads now at 175bps versus 94bps last January.2 As for the broader economy, real GDP growth—which, we believe, tends to be correlated to unlevered cash-flow growth—is expected to slide to 0.3% in 2023 from 1.9% in 2022.3
These real risks notwithstanding, we believe 2023 could potentially offer compelling opportunities for selective long-term real estate investors able to provide precious liquidity for property owners faced with maturing debt in a difficult environment, as well as for open-ended investment vehicles forced to navigate increased redemptions. In addition, we believe the underlying drivers of value in this asset class—including population growth, strong capital structures and solid business plans—should outweigh current macroeconomic challengers over the long term.
At Almanac, we are excited about the opportunity to deploy capital in this uncertain—yet potentially fruitful—investment environment.
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1Real Capital Analytics as of 12/21/22; 2Commercial Real Estate Alert as of 12/16/22; 3Bloomberg as of 1/3/23.