Market Outlook 2023
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The work we do right now, the offers we write right now are laying the groundwork for who's going to get those best deals at whatever the new bottom is coming outta this market. So I think now is an especially important time for our firm to be highly active. We should also be, we should be highly active and highly selective.
Yeah. At the same time. So here we are. A lot has changed. We think a lot is going to continue to change and we thought this would be a good time to speak to how we're seeing the market change over the next six to 12 months.
Yeah. Thought we'd start by talking a little bit about what has changed over the last six months. Right. Well, the Fed is raising interest rates and. The market's starting to react. As we stand here interest rates are sort of high fives is what we're seeing on multifamily and industrial deals.
We are being offered 50 to 55% loan to value loans. A year ago, six months ago, eight months ago, we would've been 3.75, 4.25 interest rates and being offered. 65 to 70% loan to value or loan to cost. So, mm-hmm. The markets has tightened up and while we've been able to adjust to that in our deal underwriting, things are changing also now on the capital side and on the deal side.
Yeah, absolutely. The the debt market is probably the, the biggest direct impact on our business. Mm-hmm. You know, we historically focus on fixed rate debt, so from a existing portfolio standpoint, it hasn't been a big impact. But new deals today, without question, are worth less, or we can buy them at a lower price than we would.
Be willing to buy them at six months ago. Yeah. 'cause if all other variables stay the same and debt cost moves up by, call it 50% or 60% plus the leverage goes down. Yeah. Then we're at a new price that we can, we can buy things and, and we're certainly in the middle of price discovery, as I've heard the term used.
When I was at the National Association of Real Estate Investment Managers Conference last week. And you're headed to the Pension Real Estate Association Investors or Yep. Priya this week. Yep. And so the sentiment I picked up last week among other things is we're hearing a lot about the, the denominator effect, which is that institutions who have an allocation for real estate versus stocks and bonds are now out of whack based on the stock market going down.
But they haven't written down their real estate and they're discussing that. But now they're in a spot where they may need to sell real estate, which puts pressure on downward pressure on prices and also decreases the amount of capital that they're interested in putting into real estate, which which slows down the institutionalized investor side of this business.
So we've got a few macroeconomic things. We've got debt costs, Have gone up effectively and likely are continue to going to continue going up. And with that cap rates, there's upward pressure on cap rates, which is a downward pressure on values. And then you overlay this third dynamic of kind of capital flows, which is, you know, less, arguably, less institutional capital in the real estate space until they get their denominators back.
Back in alignment. So, yeah, that, that that I guess is the context of where we are today. How do we see the 2023 playing out? Yeah, so my, our instinct or my instinct leaving from last week is that the first few quarters or next year are gonna be pretty quiet. I suspect that the second two quarters will be pretty active.
Especially as we get toward, towards the end of the year, it might be even a frenzy as people come back to the market. But these next two, three quarters I think will be pretty quiet. I think way people approach this is that they want to see some sort of bottom and they wanna see some sort of bounce.
You don't get paid well for anticipating the bottom. You get paid well for hitting the bottom and rising off off the bottom. I think that sentiment's pretty common. What's, what's interesting for us though, and, or, or why don't you, do you have any comments on that last part? Yeah. You know, it's, it's interesting because that's the price discovery that we're going through.
Yeah. Essentially, what, what I would say broad consensus is, is that we are currently in the price discovery. We haven't, we haven't found where the new market is settling out. And so it, it really will be probably into Q one, Q two of next year before. Pricing is well recognized, where it, where it has moved to.
And so that, that also speaks to how are we investing during this period of time. And I, I'd point out though, coming out of last week's conference, that sort of sentiment is that multi-family may drop 10%. Industrial real estate may drop five and office may drop much more. Mm-hmm. There's a lot more distress around office.
And retail would be somewhere in the middle. What's interesting about that is that's sort of institutionalized, stabilized, better market real estate. Most of what we buy is in the value add space. It's on the cusp of what are institutionalized prop properties. So I think we're a little bit insulated from that, but well, and the other thing, there's some prices going down.
The other thing that we find in the more inefficient markets where we operate is Price discovery is a little bit of a slower process Yeah. Than, than in primary markets. But the flip side is that we also find sellers that are already adjusting to the new normal. Yeah. And I think that's an important point, is that Not all sellers have taken this pencils down approach, and there's really two primary motivators if they're not.
One is I need to sell my debt situation, whatever certain circumstances require me to sell. But then the other thing that we're seeing in the market is if I'm getting a 10 or 15% haircut from what I thought I could sell a property. Relative to the runup that I may have received over the last three to five years, I'm also willing to essentially take chips off the table and recognize a lower return than I might've liked, but also recognizing that, am I gonna, am I going to return to that heightened level anytime soon?
Yeah. And that's, I'd say those are the sellers that we're transacting with, and it takes a lot more underwriting, a lot more deals to look at, to get to those sellers that are that, that have adjusted to the new reality. Yeah. I heard a lot last week about re trades and properties being re traded.
Frequently. So price dis discovery is happening, happening actively we that and in escrow on some of the deals we're working on, we're doing, yep. Same thing. So I mean, if we, if we went in underwriting, you know, an interest rate that had already moved, but then it moved further while we're in escrow, you know, it's the, it's the same sort of thing.
It is a, it's an active process and I, I think one of the takeaways from this is that probably the next. Six, really, probably the next 12 months is really kind of expert zone investing. It's not, it's not investing as, as a kind of passive, inactive investor. It's not the environment that you want to be investing in because you don't have the real time knowledge and feedback loop.
An active, regular investor has. But if you are an active investor like us, it's a time of caution, but it's also a time of you know, disciplined, focused analysis and, and execution. Couple things. The first is be fearful when others are greedy and be greedy when others are fearful at Warren Buffet saying the other idea is that we're a smaller firm on the institutional spectrum.
We're, we're a very small firm on the institutional spectrum. Now is a chance for us to stand out while large, larger, more bureaucratic firms are, are pausing. This may be a great time for us to enter sort of more desirable secondary markets that otherwise were overpriced. There will be fewer bidders.
There will be selective opportunities where there are great deals to be had. The other thing is that deals don't happen quickly. You can't show up at the exact right moment and have the deal flow you want and, and execute sellers especially the sellers we buy from, we tend to buy from families.
We tend to buy from non-institutional sources. They go through a, a, a selling process. And to be, they, they, you often call stages of grieving, stages of grief. They're like, well, they, they're thinking through why they might need to sell. Some of these people are moving to different states or are, are, are readjusting.
They're going through generational changes and you have to be at the table the whole time or you won't be at the table when they transact. These are not efficient. Transactions and so well, and I think you're speaking to the off market process because if you're used to working through a bidded environment, then it's waiting until the bid asks, spread, connects and so that there isn't a spread and that's when you start transacting.
But we're the, the process that we go through is, you know, we, we might look at a property and underwrite it and then a year later, We finally get to a meeting of the minds on pricing and actually transact. And if we're not actively going through that process and going through the underwriting, then, then we're you know, we're, we're diminishing our pipeline.
Great news. Is that a year from now, somewhere between six months and 18 months from now. And it'll be a spectrum. It'll happen in stages. The market is going to have received its correction and be accelerating out of it. And I think it'll be a high growth time between there and say 2028. Mm-hmm. So the work we do right now, the offers we write right now are laying the groundwork for who's going to get those best deals at whatever the new bottom is coming outta this market.
So I think now is an especially important time for our firm to be. Highly active. We should also be, we should be highly active and highly selective. Yeah. Yeah. At the same time. And I think as 2023 unfolds I, I suspect that what we will see is some form of a mild recession. The, the broad consensus generally in terms of real estate as a, as an asset type is that we are not in the leverage position that we were going into the Great recession.
We're not in the debt situation that we were. And you know, broadly the, the decline in values anticipated over this period of time is of a much smaller magnitude. So I think come the end of 2023, we'll definitely be in a position where you know, the, the market is functioning at its normal rate, which as an active investor I may not, we may not look forward to.
It's it's times like these that we're in right now and then over the next six to nine months. That is really when experienced investors disciplined investors. Make great investments and once the, the market is kind of fully baked is when it gets harder to do that.
Summary
Joe and Ryan share their thoughts on where the market is headed in 2023, how it might affect strategies, and Graceada Partners' business as a whole.
In this Episode
How has the market changed over the last 6 months?
How will the market change over the next 6 to 12 months?
What investment opportunities can we expect in 2023?
Runtime
12:57