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2023 private equity trends: What LPs are saying about the real estate market

There’s a bleak outlook for the residential property market as 2023 private equity trends begin to emerge. Global forecasts indicate economic growth will slow in 2023 due to rising interest rates, inflation, and war. Consequentially, U.S. public pension funds have started to pull out of commercial real estate.

However, not every limited partner (LP) believes we’re headed toward a crash or recession. By digging deeper into 2022’s data, we can determine which real estate market trends are most likely to occur in the coming year.

Will office space recover as employees return to the office?

In early 2022, real estate moguls like Sam Zell theorized that the office market would rebound once COVID-19 became less risky, and that professionals would return to working in person. Demand for office space jumped 20% in March 2022, on pace with expectations.

But investors underestimated how strongly workers would want to continue working from home, with many employees specifically seeking remote jobs. As a result, real estate funds and real estate investment trusts (REITs) have started to shy away from office investment opportunities.

As of late 2022, office market recovery has been uneven and largely stalled. For example, in the Minneapolis-St. Paul area, vacancies rose to 15.3% in the third quarter of 2022. But in Oahu, Hawaii, vacancies decreased slightly from 14.18% to 12.85% over the same period. Additionally, Colin Yasukochi, the Executive Director of Tech Insights at CBRE, said the vacancy rate in San Francisco is likely “going to continue to creep up over the next couple of quarters because demand remains subdued.”

Although some localized regions are doing well, it may be a while before the office market fully recovers. For those still struggling, exploring new real estate investment opportunities for office spaces may be the best option.

Just as some defunct malls have been converted into medical facilities, office spaces can be converted into labs, retail spaces, or even low-cost housing. Although “office buildings” may not rebound, the commercial spaces that used to be office spaces may still be a stable equity investment for those interested in redevelopment.

How quickly will retail commercial real estate recover?

Retail commercial real estate has many investors and economists perplexed. Although signs have long pointed toward collapse, the retail industry has exhibited remarkable levels of stability, even in the face of widespread inflation. If current indicators are correct, the retail sector may hold on longer than most investors predicted. However, it’s still a risk that investors should remain aware of.

Many large retail companies, including mainstays like Bed Bath & Beyond and Sears, shuttered locations throughout the pandemic. Despite this, The Wall Street Journal’s second-quarter report for 2022 was optimistic. During this quarter, vacancies decreased, rents increased, and more stores were opening than closing — though this may be because more vulnerable stores already closed earlier in the pandemic.

Although consumers aren’t spending at the rates they were during the pandemic, many continue to spend and invest in high-quality luxuries such as vacations, entertainment, and shopping. This may be in part due to how wealth has been redistributed throughout the pandemic, as many well-off households became wealthier thanks to soaring stock markets and property prices.

This “U-shaped recovery” — where the upper-class flourishes, the lower class grows, and the middle class disappears — could indicate that both luxury and budget retail are becoming more profitable than retail targeted toward the middle class. It could impact the value of many real estate assets, property types, and even alternative investments.

Will rate hikes lead to a major crash in residential housing?

According to billionaire investor Barry Sternlicht, a major crash will likely hit the housing market due to federal rate hikes. As of October 2022, the average rate for a 30-year mortgage reached 7.24%. Housing prices are falling due to these interest rates and may fall by as much as 20% in 2023 as mortgage rates approach double digits.

If this crash occurs, average home buyers may be priced out of the market due to higher interest rates. This, however, presents an opportunity to private equity real estate (PERE) groups to purchase heavily discounted properties.

In 2021, investors purchased 24% of single-family homes sold nationwide. Although properties may be available at a discount, it’s unknown to everyone where the bottom of the market may be. PERE groups that feel opportunistic and wish to take higher risks can try to purchase properties at the bottom of the market, while more cautious groups may wish to stay out of the market or move toward liquidity.

With interest rates as high as they are, homeowners with older, rock-bottom rates may be hesitant to sell their properties. If builders hesitate to build (which, given the surplus of housing, is likely), this will ultimately lead to a lack of supply and another increase in demand.

Additionally, when single-family “starter homes” become unaffordable, multifamily homes, condos, and townhomes can experience a price jump. The people who would have been buying a single-family home are now willing to pay more for a multifamily home.

Private equity real estate funds are leveraging various strategies to gauge investor sentiment. The New York State Teachers Retirement System is shifting its fund, selling low-performing properties, and spreading into niche arenas. Meanwhile, global wealth investment funds are eying U.S. real estate.

Opportunities arise amid 2023 private equity trend predictions

PERE teams must be able to recognize opportunities as they arise, wherever they arise, if they wish to remain successful — especially within a volatile, globalized market. Real estate investors may find themselves increasing their diversification, looking at alternative types of investments, and otherwise changing their investment strategies.

“I’m excited by opportunities that may arise because other people don’t look at them the way that we do,” Sam Zell said on the Common Sense and Uncommon Profits podcast.

As 2023 private equity trends reveal themselves, there are many unknowns. But you can make your job a little easier by collecting the business and relationship data that matters to you. DealCloud’s all-in-one private equity platform provides you with the up-to-date, consolidated, third-party information you need to complete due diligence, assess risks, and prioritize your deals.

With DealCloud, you can:

  • Sync with your entire team from anywhere in the world
  • Prioritize deals based on first-party interactions and third-party data
  • Act swiftly to move through due diligence with shared checklists and automated templates

Sign up for a demo of DealCloud today to learn how DealCloud can help your team thrive in the real estate market.