A Real Economy publication

Real estate industry outlook

Aug 15, 2023

Real estate outlook key takeaways

The stress on liquidity and real estate lending continues amid uncertainty around interest rate hikes.

With traditional capital channels constrained, family offices have a unique opportunity to serve as real estate sponsors.

Contech adoption will be critical to help combat the labor shortage and declining productivity growth.

Real estate trend #1: Shifting investment strategies

Persistent inflation and elevated interest rates have introduced disruption to the real estate industry, prompting a shift in investment strategies that may endure for years before a new growth cycle takes shape. The uncertainty surrounding the timing of interest rate hikes by the Federal Reserve has led to a sharp decline in transaction volume, causing investors to rethink their investment allocations. The focus has shifted from chasing short-term appreciation to stabilizing investment income while the market undergoes correction. In response, investors are turning towards low-risk strategies, such as debt funds tailored to alternative financing positions and open-end structures aligned with a long-term recovery outlook.

The real estate market remains in a state of flux, grappling with uncertain pricing dynamics. Transaction volume has seen a significant drop in the first half of 2023, marked by a 40% decrease in deal count and a 65% decline in aggregate sales volume compared to the same period in the previous year. This decline underscores investor caution. Diversification of capital deployment across various sectors and geographies is becoming a trend to mitigate market risk. While multifamily properties initially performed well post-pandemic, demand has since tapered, notably evidenced by a 74% drop in aggregate sales volume in the first quarter of 2023 compared to the same period in the prior year. The emergence of open-end funds and debt investments is indicative of a strategic shift, with investors seeking to maintain stability in investment income amid the prevailing uncertainty.

Real estate trend #2: Family office investment

Family offices are emerging as a noteworthy alternative capital source for the real estate sector, as institutional investors opt to bolster their balance sheets amid ongoing uncertainty over interest rates and capital market risks. Traditional funding channels are constrained, evidenced by decreased new fund numbers and aggregate capital raised. Family offices are seizing the opportunity to redefine their role as investment partners for real estate firms, offering flexible funding solutions like rescue capital, bridge lending, and private debt.

Over the past two decades, family offices have seen significant growth, particularly driven by the tech, finance, and real estate sectors. Many are now turning to real estate as a favored alternative investment option, driven by tax advantages, wealth protection against macroeconomic volatility, and long-term wealth appreciation. As the industry adjusts to this trend, family offices are increasingly participating in the real estate capital market, holding real estate as a significant portion of their wealth. They are engaging in direct investments and co-general partner positions, attracted by transparency and favorable profit allocations.

Going forward, successful track records and strategic partnerships will become crucial as family offices navigate the evolving economic landscape and its impact on real estate investments.

Real estate trend #3: The rise of "contech"

The construction industry is undergoing a transformation driven by the rising prominence of construction technology: "contech". Despite being a significant contributor to the global GDP, construction methodologies have remained largely unchanged, even as projects grow more intricate. However, the sector is now at the threshold of a substantial shift, propelled by an impending surge in infrastructure spending triggered by legislative measures like the US Infrastructure Investment and Jobs Act and Canada's Investing in Canada plan.

This surge in infrastructure projects is prompting a reevaluation of traditional practices, particularly through the lens of contech. As the industry faces challenges like a severe labor shortage and diminishing productivity growth, the adoption of innovative technologies becomes a critical strategy for maximizing operational efficiencies.

The contech landscape is witnessing remarkable growth, marked by significant investment and a burgeoning wave of startups dedicated to solving industry-specific problems.

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