Friday, December 29, 2023

2023 Recap (No Clever Title This Time)
Yet another year has come and gone for TRET and it’s time for our annual wrap up. Let’s start with this blog. This year started for us with a focus on individual wealth generation through real estate. This noble goal dominated the blog for the first couple of months of the year and was continued in an expert fashion by this year’s guest writer—Sharon Wagner. All of our residential real estate articles have had a wealth generation theme and we will continue to honor this commitment to wealth generation going forward.

As the year progressed, I was inspired to take a look at the commercial real estate market and how it has changed in the past three years. These changes are evident to both avid real estate enthusiasts who regularly follow market and to anyone who lives in a neighborhood with local businesses. Guided by this inspiration, I wrote a series of articles describing the state of the various commercial real estate property types that was as fun to write and research as it was informative. Documenting changes in the market will allows be a topic of inspiration, so let’s talk about what actually happened in the market.

Normalization Front and Center

Theme for this year in real estate was normalization. Much of the market has begun to settle into the reality of higher than usual interest rates. Although these rates have not continued to rise in recent months, they are much higher than they have been in the past twenty years. When the Federal Reserve unveiled its plan to raise rates 21 months ago, the initial sentiment seemed to be that this policy would be dynamic and temporary. Nearly two years later, however, interest rates above 7.5% seem to be the norm and the real estate pricing and utilization have adjusted.

Residential Recap

The residential market continues to decline, after being overheated in some areas and gridlocked in others. The current interest rate market desensitizes buyers to purchase and prevents owners from refinancing. One could technically say that the balance of power is in the buyer's hand, but with such little incentive to purchase, sellers often have to employ tactics to induce a purchase that are cost prohibitive and not worth the effort. Further exacerbating the issue is the oversupply of new construction that entered the market in the past 18 months, putting further downward pressure on housing prices and further squeezing sellers. While some prognosticators are predicting that the housing market has reached its bottom this year, you will find no such predictions here. What is clear, however is that the housing market is on the declining part of the pricing curve the current real estate cycle. Since it is at the beginning portion of this curve, things seem to be moving slowly, as the tide continues to change. 

Each commercial property class has made its own set of corrections throughout this year and all have been noteworthy. The office market has begun to accept the irreversible nature of repurposing. The price expectations for office properties have come down dramatically and unlike in the past, there is little expectation of a return to the past. Furthermore, the tried and true method of converting excess office space into residential space no longer seems like a viable solution, as the market for such conversions is affected by the oversupply of residential property. Office property is indeed in a unique situation in which owners and investors continue to search for answers.

Retail Recap
The retail market this year also underwent dramatic changes. These changes, fueled by an industry-wide reevaluation of the needs of retail customers, have seemed to greatly serve the retail market. Gone are the days of megamalls filled with many different stores and providing the “mall experience.” Retailers have opted to use their retail locations instead as points of contact for their consumers, providing returns and pick-ups for online customers and services for walk-in customers. For many companies, their retail locations have become the physical manifestation of their online presence. Retail locations have adjusted to provide the streamlined, informed shopping experience that current shopper now seek. This change in approach has served the retail real estate market well. Unlike office properties, retail real estate is thriving according to most indicators, with the only lagging sector being megamalls.

Industrial, Multifamily and Hospitality Recap

The multifamily and the industrial property sectors have similar stories in 2023. Whereas these sectors fueled most of the commercial real estate growth of the past three years, they have now noticeably cooled, but continue to function at a high level. Both markets have suffered from overbuilding, as is to be expected after a long period of above-average demand. With supply out pacing demand in both markets, the once overheated industrial market and the well-performing multifamily market have some back down to Earth. Hospitality, on the other hand, continues to perform very well and is experiencing above average demand. A brief explanation regarding the factors that lead to the current state of the hospitality property industry can be found here.

What About The Future?

Although it has certainly been an interesting year for real estate and another great year for TRET, no annual recap would be complete without predictions for the future. Although no predictions about the future of the market will be made by us, you can look forward to TRET in the future continuing to provide with you quality articles and the occasional podcast on the real estate market. We will continue to cover both the residential and commercial real estate markets. We will continue to speak about investment trends and ways to build wealth. Also look for a return to the articles on general real estate concepts that were the bread and butter of this blog early in its existence. 2024 looks like it will be another great year for the Real Estate Think Tank and we are looking forward to it.

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