2022 has been an eventful year. Covid-19 seems to finally be trending behind us, interest rates are materially higher, property values – both residential and commercial – have decreased in value, and the consumer is feeling the pinch of inflation. The question is, however, what is in store for 2023? Will these trends continue? Will new opportunities unfold, or will old ones persist?
As a real estate investor – or any investor for that matter – to be successful, you must learn to adapt. However, adapting could mean different things for different people. For us, adapting means creatively raising capital in a challenging macro backdrop. It means resharpening our pencils to ensure deals remain attractive for our investors despite the trying times we are in. And it means always staying one step ahead of our competition.
In this article, we’ll discuss the real estate trends to look out for in 2023 and how we are getting ahead of the curve to benefit from these events and opportunities. Let’s dig in.
High Interest Rates – The New Normal
Covid dramatically shook up the global economy. Lockdowns, supply chain issues, and massive fiscal stimulus have had a major impact on inflation, availability of goods, and the price of assets such as real estate, businesses, and stocks. As a result, the Federal Reserve – and many other world banks – have raised interest rates precipitously to reduce inflation. And, due to this increase, the consumer has had a much harder time getting access to funding, businesses have struggled to finance growth initiatives, and real estate has become more unaffordable. Will this trend persist?
Although interest rates might not necessarily rise as quickly as they have in 2022, they’ll likely stay at a much higher base in 2023. We’ll likely see a slowdown in the rate volatility, but don’t be fooled, you will not see 3.00% interest rates for many years. Inflation – manifesting itself in the cost of services, goods, and commodities – is a structural issue. Rates will likely have to stay elevated for at least another 12 months (if not longer) before the Federal Reserve looks to ease the pressure and make borrowing cheaper again.
At Safe Storage Investors, we are underwriting this risk in every deal we look at. Higher interest rates mean we must be extra careful about how we borrow money and how we analyze our portfolio. Real estate investing was much easier when interest rates were 3.00%, but times are changing. Luckily, we have a phenomenal set of assets that will throw off excess cash – even in this challenging environment.
Property Values Will Likely Continue to Fall
Capitalization rates – the input that determines a property’s value – are directly correlated to interest rates. When interest rates rise, capitalization rates rise as well. That means property values will drop, even if net operating income and cash flows remain constant. Back in 2020 and 2021, self-storage facilities could be purchased for 6.00% or 7.00% capitalization rates. Now, the story has drastically changed.
Manhattan real estate, largely known as one of the most stable markets in America, used to have 3.50% capitalization rates. Now, those are trending higher and real estate values are going down.
However, there are more factors at play here. Real estate values are also dependent on sales comparable analysis and appraisals. One reason why real estate values in 2023 will likely decrease even further is because appraisers, when valuing properties, have been backdating their data before interest rates have risen so dramatically. In 3-6 months from now, appraisers will start reflecting the new reality and will likely mark down prices even further. Look for sellers to embrace this new reality and start marking down their prices if they want to sell. We are tentatively waiting for the right pitch. Once prices come down, we’ll be ready to step in and gobble up some great self-storage assets.
Self-Storage Will Continue to Outperform
Self-storage is a resilient, recession-proof asset. The market and economy have been very shaky as of late. Many economists are predicting a recession will materialize sometime in 2023 or early 2024. Obviously, there is no telling what will happen and how events will transpire. However, we’ve elected to continue to purchase and develop our self-storage facilities because it is the best risk-adjusted return in the market today.
Tenants are unlikely to vacate, even if prices rise. As homeowners look to save money and downsize, they’ll need more storage for their furniture and other possessions. Self-storage provides a much-needed service for so many consumers across America. Maintenance is very low, and our facilities are in pristine condition right next to attractive, growing communities.
Amidst the chaos that seems to be saturating the news outlets and networks, self-storage will provide us and our Limited Partners with the much-needed calm and profits to not only survive but thrive into 2023 and beyond.
To learn more about our principals and our operation, please visit safestorageinvestors.com