What can your real estate investor clients expect in 2023?

This post is part of a series sponsored by SWBC.

Over the past two years, real estate investors have experienced a global pandemic, a nationwide housing boom, out-migration from urban centers, inflation reaching 40-year highs and steep interest rate hikes that are now starting to cool the housing market.

Overall, this has been one of the most disruptive periods the rental property market has seen since the housing market crash of 2008. Today, your real estate investor clients are focused on protecting their bottom line while growing their portfolios.

As your clients’ trusted insurance broker, it’s important to understand the changing market and the challenges that come with it so you can provide the most valuable support when they come to you with questions or referral requests.

In this article, I̵

7;d like to share valuable insights from SWBC’s Chief Economist, Blake Hastings, on the current state of the real estate market and the outlook for investors in 2023.

Housing costs, inflation and interest rates during the fourth quarter of 2022

Housing costs, which make up about 30% of the inflation index, continue to be high and are likely to do so for at least another year.

Due to technicalities surrounding how inflation is calculated, rising house prices feed into rents and related housing cost measures with a significant lag of 12 to 18 months.

With home prices appearing to have peaked in September and posting a slightly negative number across the country, we could still be a year away from peaking rents. The chart on the following page shows their estimate of the rent and the owners’ corresponding rent portion of the Consumer Price Index.

At the same time, interest rates are rising for all CREs:

Housing sector supply and demand during the fourth quarter of 2022

Both supply and demand are cooling in the housing sector. Housing prices are expected to remain stable.

2023 US Real Estate Outlook

Single-family residence

• This property sector will continue to be weak with some price deterioration of around 5-7%.
• Both demand and supply are decreasing, which should limit price declines.

Multi family

• This sector will see rental rates slow, but still grow by 4-5%.
• Cap rates are still falling despite higher rates, but the trend should reverse in Q4 2022 or Q1 2023.
• Higher interest rates and cap rates will slow new developments until 2023 and 2024.

industrial (warehouse)

• This real estate sector will hold up well as continued shift to just-in-case from just-in-time inventory management will sustain demand.
• Rents will be unchanged to maybe up 1-2%.
• Higher interest rates and cap rates will slow down new construction.

The retail trade

• This sector is likely to slow down. As retail continued to be challenged by inflation, marginal retailers will struggle
• Rents should be unchanged to down 3-4%.
• New development will be very soft.

Office

• This sector continues to be the biggest question mark. Working from home and hybrid arrangements are likely to reduce demand by 15% per worker by 2023.
• Rents will likely be around 5-7%.
• New developments will be challenged in the coming years.

When your clients partner with SWBC for their real estate investor insurance needs, they will receive first-class service from a company that has served this market for nearly 30 years. We stand by our reputation for providing a consultative approach to meeting the needs of your REI customers and recognizing any gaps in existing insurance coverage they may already have while keeping costs in focus.

Visit our website to learn more.