The global real estate market is facing a challenging year in 2023, as high inflation, rising interest rates and political instability weigh on the sector. However, some experts also see signs of stability and recovery later in the year, as well as opportunities for innovation and sustainability.
According to a report by PwC and the Urban Land Institute1, the underlying narrative around real estate in 2023 is one of caution, although there is some hope for stability and renewed investment activity later in the year following the uncertainty of high inflation and rising interest rates over the past 12 months. The report is based on interviews with senior property investment professionals and regional surveys conducted in Europe, United States and Canada, and Asia Pacific.
The report highlights that real estate must work much harder for its returns, as the familiar tailwinds of plentiful liquidity, loose monetary policy and cap-rate compression appear to be over. The market will also have to deal with an elevated interest rate environment compared with the zero-percent years after the Global Financial Crisis (GFC). The Fed decided not to raise the federal funds rate at its September meeting, but projections suggest that it will reach 5.6% by the end of 20232, implying at least one more rate increase this year. This will indirectly impact long-term home loans, such as 30-year, fixed-rate mortgages, which have already reached a 2023 high of 7.31% at the end of September2, the highest level since 2000.
As a result of these macroeconomic factors, housing market activity remains weak overall, with home prices hitting record highs in July and existing monthly home sales sagging for the second consecutive month2. The market remains as competitive as ever, thanks to demand levels surpassing the ongoing inventory crunch and homeowners who locked in low interest rates staying put. These and other factors perpetuate the perfect affordability crisis storm that continues to sideline many aspiring homeowners.
However, not all is gloomy in the real estate sector. The report also identifies some positive trends and opportunities for investors and developers who are willing to adapt to the changing market conditions. Some of these include:
- Making offices fit for purpose: More than three years on from the onset of the COVID-19 pandemic, great uncertainty remains as to how much companies and their employees will use office buildings in the future. Though the office sector is likely to remain a mainstay for most institutional investors, there is no consensus around where occupier demand in a hybrid working world will settle. But there is a strong sense that the sector will experience something of the same disruption as retail albeit through different structural drivers. One global investor speaks for many in declaring: “Office is the new retail.”1 This means that office owners and operators will have to rethink their strategies and offerings to attract and retain tenants, focusing on flexibility, amenities, technology and sustainability.
- Investing in alternative sectors: As traditional sectors such as office, retail and residential face headwinds, investors are increasingly looking for alternative sectors that offer higher returns and lower risks. Some of these include logistics, data centers, life sciences, healthcare, senior living, student housing and affordable housing. These sectors benefit from strong demographic, social and technological drivers that support their long-term growth and resilience.
- Embracing sustainability and social responsibility: Real estate leaders are finding that environmental, social and governance (ESG) factors are becoming more important than ever for their businesses. Not only are they facing increasing regulatory pressures and consumer expectations to reduce their carbon footprint and improve their social impact, but they are also realizing that ESG can create value and competitive advantage for their assets. According to the report, ESG is no longer seen as a cost or a compliance issue, but as a strategic opportunity to enhance performance, reputation and stakeholder relationships.
- Leveraging technology and innovation: Technology and innovation are key enablers for real estate to overcome its challenges and seize its opportunities in 2023. From digital platforms and tools that facilitate transactions, communication and collaboration, to smart building solutions that optimize operations, efficiency and user experience, to emerging technologies such as artificial intelligence (AI), blockchain and 5G that create new possibilities for data analysis, security and connectivity, real estate players are finding that technology can help them achieve their goals faster and better.
In conclusion, real estate in 2023 is a year of caution and hope. While there are many uncertainties and risks facing the sector, there are also many opportunities for those who are willing to adapt, innovate and differentiate themselves in the market. As one interviewee puts it: “Real estate is still a great asset class. You just have to be more selective about what you buy.”1