The real-estate sector has experienced a tumultuous few years, and experts expect 2023 to be the same. According to industry leaders, certain trends are anticipated to continue or even grow, while others promise major disruptions.
Yet, investors and other buyers still have opportunities if they make informed decisions and stay abreast of the following developments.
For Ari Rastegar, founder, and CEO of Rastegar Property Company, the most important real-estate trend of 2023 will be financial headwinds in the office sector.
“What we’re seeing now is a massive debt bubble of hundreds of billions of dollars — the last number I saw was $500 billion — in bad office debt that’s going to come to maturity,” he says. “Most of the commercial real estate lending business is built on the 10-year treasuries. In 2023, loans done in 2013 or 2014 — when the market started to roar back in a meaningful way — are coming to maturity. Yet, the office-sector market in 2014 is as different from today as night and day.”
Indeed, experts have likened today’s office-building marketplace to an “apocalypse” due to the shift to remote work during the pandemic. “We’re going to learn the solvency of many institutions holding this paper, so it’s important to watch what happens particularly in that sector,” Rastegar concludes.
An SVN Commercial Advisory Group associate advisor, Rachel Goldman, raises concerns about 10-year treasuries. Due to the vacancies in office buildings, she also predicts developers will “get more creative in converting offices to apartments in New York and elsewhere.”
Dutch Mendenhall, founder of RAD Diversified REIT, foresees opportunity due to a wave of foreclosures. “These have built up through the pandemic and hyperinflation,” he explains. “With rising interest rates, people can't refinance and sell as easily to get out of properties.”
Goldman concurs. “Unfortunately, due to inflation, refinancing with increased interest rates on the residential side isn’t usually advisable, and I foresee a lot of foreclosures in the future,” she says. “Within the last year, the cost of living has increased dramatically. It can be difficult for people to keep up with the high cost of housing and basic living expenses like food, clothing, housing, insurance, property taxes, and more.”
Mendenhall points to the foreclosure numbers in Harris County, Texas, and Philadelphia County, Pennsylvania, to gauge the size of this trend. “We’ve done a ton of foreclosures in those two markets,” he says. “A conservative estimate would be 600 foreclosures in each of those markets every single month, which translates into 7,200 foreclosures a year. Now, consider that foreclosures didn’t happen during the pandemic for three years. That's 21,000 foreclosures that haven't happened in each market, so you're talking about 42,000 foreclosures in just two cities.
“If you take the top 10 cities in America and run those same numbers, there are hundreds of thousands of foreclosures in America that haven't happened for years. So, the ability to buy at a deeper discount, and the ability to buy properties going into foreclosure or buy and negotiate deals, is huge.”
Rastegar is also bullish on the single-family-home market. “Renters are starting to get interested in buying again,” he says. “The upsurge in multifamily pricing wasn’t just because people didn’t want to rent — it was because they weren’t ready to buy. Now that they are, even with interest rates as high as they are, you’re still starting to see some more upstart markets beginning to grow.”
According to USA Today, midsize markets that didn’t experience a pandemic boom — like Hartford, CT; El Paso, TX; Louisville, KY; and Worcester, MA — are positioned to perform well in 2023. Approximately half of these home buyers are remote workers who are moving from expensive metropolises like New York City and Washington, DC.
The search for affordable housing is a key driver in this trend. As a financial expert and CEO of Total Wealth Academy, Steve Davis explains, the days of aspirational pricing are over in the single-family home market.
“In 2021 and early 2022, due to ignorance and exuberance, many families paid over asking price just to get a house, but that’s never a good idea,” Davis says. “People are waking up to that fact. The number of offers on houses has dropped dramatically over the last six to nine months. I have not seen an over-listing price offer since then.”
Still, Goldman anticipates that the Florida housing market will stay strong. “Over 300,000 people continue to move to Florida every year,” she explains. “South Florida is the ideal location for rental properties, as well as fix and flip deals.”
Justin Draplin, founder and CEO of Eclipse Cottages, agrees that housing affordability will shape real-estate trends in 2023. “A lot of young people are looking for ways to reduce housing and maintenance costs,” he observes. “That’s why interest in tiny homes continues to grow. Tiny houses can be constructed in a matter of days, and even brand new and fully customized, they cost a fraction of what a traditional home does.”
The Motley Fool agrees, stating that “tiny homes are more popular than ever. The global tiny home market is expected to grow by about 4% in 2022, with most of that concentrated in the U.S. The market is expected to hit $4.7 billion in global revenue by 2026.” The affordability of this housing solution is one of the many reasons why 63 percent of Millennials report they would consider buying a tiny home.
Draplin points out that tiny homes offer many opportunities for investors. For instance, these inexpensive properties may be turned into lucrative vacation and long-term rentals. When constructed in Opportunity Zones — geographic areas where the federal government incentivizes development — owners can also reap tax credits and other benefits.
Housing affordability will drive an increased interest in Accessory Dwelling Units (ADUs), according to Jonathan Rundlett, President of EXIT Mid-Atlantic. “An ADU is an additional housing unit built on a single-family residential lot,” he explains. “An ADU is required to have its own separate entrance, a kitchen, a bathroom, and a living area. There are many different types of ADUs — they can be anything from an additional new construction on the lot, a bump out of an existing property, to a conversion of a garage or basement.”
Rundlett has noticed a change in how government officials approach these affordable housing solutions. “In the past, many counties had restrictions on building ADUs, but with the current lack of inventory, many counties are now changing their guidelines to make ADUs permissible,” he says. “Lawmakers throughout the country are having substantial discussions about improving zoning ordinances and development regulations to make building ADUs easier.”
ADUs offer multiple opportunities for investors. “Most investors will use this as a way to increase cash flow,” Rundlett notes. “With rental rates increasing significantly recently, it’s an opportune time to provide a separate unit to rent and increase your cash flow. This structure can also be easily used to allow an aging family member to live in, rather than paying the exorbitant cost for assisted living establishments. They can also be converted to offices, enabling you to go to a separate location to work and not have the common distractions if other people are home.”
Davis points out another trend among real-estate investors: transferring money out of the stock market into real-estate syndications. “As people become more financially educated, they are literally lining up to move their money,” he says. “In our most recent deal, a 162-unit apartment complex, we raised $8 million in one day. There are thousands of syndicators across the US seeing the same results.”
According to Davis, this approach enables people to build a passive income stream while protecting their portfolios from risk and market volatility. “The goal of the real estate investor is to build a second stream of income that meets and exceeds their wants and needs,” he explains. “The quickest and easiest way is to invest passively with competent operators or sponsors.”
Even hands-on investors who flip residences have turned to syndications. “Flipping generates capital that they then invest passively in syndications, which builds a second stream of income,” he says. “I have over 2,000 investors in my group, and this is what the majority are doing.”
Despite rising mortgage rates and vacancies in office buildings, the real estate industry presents several opportunities for aspiring homeowners and investors alike. With trends like these, 2023 is bound to be an exciting time to be in real estate.
“This is the time to get in,” Mendenhall says. “Now is the time to invest. If you wait until everything goes up, you’re going to lose. Right now, it’s about moving before the market does.”