In this rapidly changing economic landscape, this is no doubt a challenging time for real estate investors. Coming from a year filled with a lot of market uncertainty and instability in 2022, it is understandable that many investors are feeling more apprehensive about
investing in 2023.

Real estate investors need to understand the emerging challenges that they might be facing in 2023, to make adequate preparations and the right investing decisions.

1. Inflation and rising interest rates

In a survey conducted, inflation and rising interest rates (29% each) were both named as the biggest macroeconomic risks facing real estate. With interest rates and inflation rising, they can have impacts on debt pricing and availability, as well as the risk appetite of investors.

Inflation and rising interest rates also have a significant impact on most, if not all, variables of real estate, such as rents, yields, operational costs, construction costs, and energy, to name a few. The rise in interest rate cap costs has also made it harder for investors to get deals, as it impacts the rates and durations of loans.

Currently, many property deals are executed at a rate where debt service coverage (DSC) exceeds 1.1x. With this uncertainty, borrowers are also warier of locking in long-term rates and are looking for shorter borrowing periods. Five and seven-year deals are becoming more popular, as these loans offer borrowers more flexibility with shorter yield maintenance and refinancing options.

As these variables are in flux and unpredictable, real estate investors are subject to quite a bit of pressure in this economic uncertainty. With this interest rate shock, transaction parties are questioning property appraisal values and lenders are adding loan-to-value cushions. This has been driving up property valuations and this is a huge barrier for investors coming into 2023.

2. Political instability

In our interconnected and globalized world, no country exists in isolation. Political instability from the war in Ukraine, as well as rising tensions between China and the United States, are bound to have impacts on the real estate market. This is especially true for international investors and developers with real estate portfolios in different countries.

Political instability can be unpredictable and cause a rise in prices in that country or region, making it risky to invest in these international real estate markets. It can also have impacts on local real estate markets, as political instability can lead to supply chain issues, as we’ve seen previously with the energy crisis as a result of the Ukraine war.

Within the United States, with the current dysfunction in Congress, experts predict that there could be some changes to legislative and fiscal policies that could impact the real estate market. In terms of policy, the Securities and Exchange Commission (SEC) climate disclosure rule, expected in April 2023, would likely lead to protracted litigation. The implementation is, the US government’s debt ceiling will also have impacts on real estate.

3. Growth of the sustainability movement

On the Environmental, Social, and Governance (ESG) front, investors are aware that they need to place a greater emphasis on ESG measures in real estate. However, the real estate industry is still struggling with figuring out how to embed ESG into operations and reporting.

ESG, while not an issue of compliance, is still an important issue for real estate investors, as they recognize the importance of sustainability in the long run. More than 90% of surveyed industry leaders agreed that running an environmentally sustainable business is the most important factor for the successful transformation of the real estate industry over the next 20

However, despite the knowledge of this importance, real estate investors are still struggling with the implementation of ESG. 70% of surveyed participants said that they are “still finding their way” when it comes to meeting ESG requirements, with another 15% saying that they are not well prepared for it.

Moving forward

In 2023, real estate investors will likely have to recalibrate their expectations for the upcoming year, as these many factors have impacted valuations and risk appetites. With the economic and political instability of the past year, many have taken the opportunity to take a breath this year by slowing down on real estate investing and reevaluating current portfolio investments.

However, there may still be some opportunities for investors, amidst this market uncertainty. Some are continuing to focus their investments on existing portfolios that they are well acquainted with, some are growing their long-term investment projects, and others are looking into upgrading their ESG best practices across current portfolios. Despite the challenges in the market, experts agree that the commercial real estate markets are generally in good standing, from a credit perspective, and there can be real opportunities for the right capital.

Not sure how to move forward with your current investment plans? Here at Black Collie Capital, we can help with your commercial real estate funding and investing needs. With over 25 years of experience in the real estate industry, we have the capital markets knowledge and relationships to provide our clients with the best possible outcome.

Our team is dedicated to each and every one of our clients and is dedicated to working closely with every one of them to ensure that their real estate funding and investment needs are met.
Contact us today to learn more!