OUTLOOK | April 20, 2023
Authored by RSM US LLP
Real estate and construction are off to an interesting start in 2023, and what happens next is anyone’s guess.
Commercial real estate has been closely watched following the banking disruption, with uncertain market conditions keeping investors on their toes. Despite doomsday predictions around office space, there is cautious optimism the sector will prevail by focusing on quality and creative strategies. While luxury properties have enjoyed strong performance and investor favor, all hospitality segments are still challenged by inflation, a shortage of skilled labor and consequent diminished consumer experiences.
Meanwhile, a confluence of factors are shaping a favorable long-term prediction for residential construction. But until mortgage rates reach a more stable terminal rate, the near-term demand for housing will remain uncertain.
In our latest economic outlook, our senior analysts examine the pressing issues, challenges and opportunities facing each of these three key sectors.
Real estate trend #1: Commercial real estate faces potential challenges
Office sector indicators point to distress, while creativity shapes investment
Commercial real estate concerns center on the office sector as distress indicators continue to escalate.
Office sector distress indicators have flooded the middle market, from public real estate investment trust (REIT) valuation impairments to high-profile loan defaults, signaling that a historically stable asset class is headed toward an unfamiliar new normal.
Pandemic-induced remote work arrangements have rapidly shifted from demand to oversupply. While some companies have implemented return-to-office mandates, the current workforce trend shows a steady increase in remote and hybrid work, leading to soaring vacancy levels in many metropolitan cities.
Real estate trend #2: Shifting consumer preferences and a focus on luxury in hospitality
Hotel market shows continued resillience with a focus on luxury
The hospitality industry remains challenged despite strong performance driving investment in the luxury hotel market.
The hospitality sector, in particular, is sensitive to current challenges in the broader economy: rising interest rates, higher inflation and a tight labor market. Even so, the industry is making strides in the post-pandemic new normal as the focus shifts to high-end, experience-rich destinations in the luxury segment.
In the early days of the pandemic, coastal and resort hotels with lighter restrictions benefited from travelers escaping quarantine. Three years later, upscale properties are now leading a rebound, having enjoyed a renaissance built on steady room rates, distinctive accommodations and an affluent market that is less price sensitive in an inflationary economy. The luxury segment is expected to remain robust amid the broader economic slowdown.
Real estate trend #3: Affordability in the housing market
Interest rates pose challenges for builders, but opportunities are on the horizon
Residential construction sees a favorable long-term outlook despite ongoing challenges affecting the housing market.
After a drastic shift in the second half of 2022, the housing market started with a strong foothold in 2023 once builder sentiment rose following reports of an early spring selling season and stronger-than-expected sales.
The recent rise in mortgage rates caused many to rethink their buying decisions and created housing affordability issues across the United States.
Thus, affordability remains a top concern for the housing market as monthly mortgage payments (assuming a 20% down payment) are up 38% from a year ago for a median-priced new home and 40% for a median-priced existing home.
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This article was written by Laura Dietzel, Ryan McAndrew, Sarah McKevitt, Matt Riccio, Crystal Sunbury and originally appeared on 2023-04-20.
2022 RSM US LLP. All rights reserved.
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