Q1 2023 Market Review: 5 Takeaways for Private Real Estate Investors
Our Q1 2023 market review shows private real estate investors are finding they need to tiptoe around some financial minefields this year. By some measures, though, the landscape isn’t as treacherous as it was just a year ago. In other words, private investors aren’t necessarily hamstrung in their 2023 quest to turn a profit.
1. How will rising interest rates continue to affect the housing market?
Anyone who’s wanted to buy or sell a home knows mortgage interest rates have been climbing as a result of the Federal Reserve’s nine consecutive rate hikes of 0.25, 0.50 or 0.75 percentage points since March 2022.
In mid-April 2023, the average rate for a 30-year, fixed-rate mortgage was 6.27%.
“Rates for home loans are still caught in a tug-of-war between high inflation and the Federal Reserve’s actions to restrain inflation, which often indirectly pushes long-term mortgage rates higher,” Forbes Advisor noted.
As a result, applications for mortgages have been seesawing in recent months, with application rates going up or down in tandem with interest rates. The application rate is still hovering around its two-decade low, though.
One reason prospective homebuyers are jittery: Every percentage point increase in the mortgage rate bumps up interest payments for the average U.S. homebuyer by $100 a month, according to the International Monetary Fund.
The decline in affordability for buyers has translated into more Americans turning to the rental market, despite higher rental costs.
For many would-be buyers, the affordability issue is forcing them to remain renters — which bodes well for multifamily investors.
In January 2023, data provider ATTOM reported that in the majority of the country, Americans found it more affordable to rent a three-bedroom place to live than to buy a three-bedroom place. Just two months later, though, ATTOM noted a shift in that dynamic: Buying, the company’s research shows, was slightly more affordable than renting in the first quarter of 2023.
Generally, private investors are moving away from investing in single-family homes, in large part because of rising interest rates and rising home prices. For private real estate investors, this could mean less competition for single-family homes. Or, given the current rate and price environment for single-family home purchases, investors may want to put more emphasis on multifamily properties.
2. What can Q1 data tell us about the direction of the market?
First-quarter data is scant at this point. But data and projections that we do have give us a sense of the direction of the market in 2023:
- The Mortgage Bankers Association expects total commercial and multifamily mortgage borrowing and lending to drop to $700 billion in 2023, down 5% from 2022.
- Foreign investors view multifamily and industrial as the two preferred U.S. property types in 2023, according to a survey from the AFIRE investors’ group.
- Sixty metro markets in the U.S. saw negative multifamily rent growth in the first quarter of 2023, ranging from -0.1% to -6.4%, according to Moody’s Analytics. That negative growth comes amid a rising apartment vacancy rate.
- The average interest rate for a 30-year, fixed-rate home mortgage is forecast to decline throughout the rest of 2023, with some experts saying it might even fall below 6%.
- In March 2023, the inflation rate inched up 0.1% from the previous month, with the 12-month increase standing at 5%, says the U.S. Bureau of Labor Statistics. Forecasters surveyed by the Federal Reserve Bank of Philadelphia expect the annual inflation rate at the end of 2023 will be 3.4%.
Data and projections suggest the market is generally heading in a more positive direction. However, private investors in multifamily may encounter tighter lending standards, decreased apartment demand and lower apartment rents throughout 2023, all while foreign investors continue to target multifamily properties in the U.S.
3. When will the market bounce back?
Things may be starting to look up when it comes to economic conditions in 2023.
The forecasters surveyed by Philadelphia Fed predict the economy will expand 1% in the second quarter of 2023 and 0.6% for the year. Before the end of 2023, the forecasters predict the economic growth will dip 0.1% in the third quarter, then return to positive territory in fourth quarter (1.2%).
For the year, they envision an economic growth rate of 1.3%. The following years are projected to see more robust growth — 1.4% in 2024, 2.2% in 2025 and 1.5% in 2026.
The slightly improved economic outlook is being tempered by forecasters’ predictions on unemployment. They believe the national unemployment rate will rise to 4.1% in the fourth quarter. For the year, the forecasters expect an average unemployment rate of 3.8%. In March 2023, the jobless rate stood at 3.5%.
Unfortunately, the forecasters anticipate the unemployment rate will rise even higher in 2024 (4.2%), 2025 (4.2%) and 2026 (4.1%).
Factors like economic and employment growth are important for private real estate investors to weigh. They must keep tabs on fluctuating economic indicators to help make smart decisions about buying, selling or building properties.
4. How can real estate investors hedge their investments?
One way real estate investors may be able to hedge their investments is by putting money into the multifamily sector, despite its somewhat rocky nature in 2023.
WealthManagement.com notes that real estate, particularly multifamily real estate, “provides a strong defensive strategy against market volatility, a hedge against inflation and a wide range of tax benefits … .”
Mortgage Professional America further explains that a multifamily investment property retains its value more reliably than an investment in the stock market does.
For private real estate investors, multifamily might be something of a safe haven in 2023 and beyond.
5. How are lenders like Broadmark filling the funding void in the wake of bank failures?
To be sure, this year’s failures of Silicon Valley Bank and Signature Bank shook up the financial markets. But non-bank lenders like Broadmark are helping fill the funding void in commercial real estate caused by the banking turmoil. And it’s a big void: Small and regional banks historically have been the number one source of credit for the $20 trillion commercial real estate market, Fox Business reported.
The recent banking chaos hasn’t shut private real estate investors out of the borrowing market. Rather, it has prompted them to seek alternative funding sources, including non-banks like Broadmark.
Are you looking for investment solutions for 2023? Contact Broadmark Realty Capital, your trusted partner in real estate finance.
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