The real estate market has been on a tear for the last several years. Both residential and commercial properties have seen significant price increases since the start of the COVID pandemic. Only this past summer have prices begun to stabilize. Now, as the end of the year approaches, prices are starting to fall. Property investors are paying attention.
The next several months will set the stage for what happens in property investments for the next year or so. With that in mind, investors will be paying close attention to three important factors in 2023:
1. Transaction Volumes
Both commercial and residential property is heavily dependent on the laws of supply and demand. You could make the case that real estate is the purest example of the supply and demand principle. Simply put, a given property is only worth what someone is willing to pay for it. Limited supply and high demand create higher prices. Limited demand and high supply cause prices to fall.
To the property investor, paying attention to transaction volumes takes the supply and demand principle to the next level by gauging actual interest. A higher volume often shows buyer interest even as supply outstrips demand. Such an inverse relationship would tell investors that commercial property is still very much in demand. On the other hand, low transaction volumes can suggest any number of things, including:
- unusually high prices
- fewer desirable properties
- excessively high interest rates
- increased investor diversification.
Will transaction volume increase in 2023? No one knows for sure. If it doesn’t, lower volumes may indicate a deeper than anticipated recession. We’ll have to wait to see how it all plays out.
2. State and Federal Regulations
It goes without saying that property investors make a point of staying abreast of both federal and state regulations. Few things impact the investment landscape as profoundly as regulation. Demographic shifts observed as a result of COVID restrictions provide ample evidence.
Over the last two years, states like California and New York have witnessed a mass exodus of both people and businesses. The main beneficiaries have been less regulated states like Texas, Florida, and Utah. According to Salt Lake City’s Actium Partners, a hard money lending firm that specializes in helping property investors, Salt Lake City has consistently enjoyed significant growth for more than a decade.
Investors prefer as little regulation as possible. Regulation only stifles their ability to earn. So they will be keeping an eye on the regulatory landscape for 2023. Wherever regulations threaten their business models, they will proceed with more caution.
3. Further Action by the Fed
The Fed has been very aggressive over the last 12 months in its attempts to curb inflation. Whether you agree with their actions or not, it cannot be argued that successive rate hikes over the last several quarters have put a damper on real estate prices. Investors have been paying attention. They will continue to do so over the next year.
They know that the Fed actively trying to limit inflation rarely works out exactly as planned. Why? Because economics are a lot like a pendulum. Economic conditions swing back and forth. If the Fed takes no further action, any negative impacts on real estate should be limited. But if they choose one or two more rate hikes, real estate could crash.
A downturn in the real estate market would actually be good for investors who take a long-term position. They would have the opportunity to buy more properties at a lower price in anticipation of an eventual rebound. Whether or not that happens, investors have plenty to keep their eyes on in 2023.