Looking forward to 2023, advisors and investment managers expect to see some major shifts in the real estate industry. In a recent AppFolio Customer Conference panel discussion, experts discussed how today’s market is changing. This article explores the top trends the panel sees impacting real estate investment for 2023.
Interest Rate Change
The changing interest rate has impacted many property types, namely commercial real estate. While rates were as high as 9% in previous decades, they’ve been in the 3-4% range for the past several years. The growing rates are causing a changing cap for when pricing no longer makes sense, causing many investment managers to require different deals. Speed in dealmaking has also become an issue, since a delay can often mean a higher interest rate.
Increased interest rates cut into profit and affect a company’s ability to expand. However, some property types — like storage — can pass off those expenses to the customer and don’t face the same struggle to maintain profit margins. As their costs increase, storage facilities tend to attract customers ready to pay those higher fees — bringing in high-end customers. On the other hand, office real estate holders are seeing a direct cut in size based on heightened costs and growing interest rates.
Investor expectations are changing more than ever due to the volatile economy. It’s important for all advisors to listen to their clients and find out what they are looking for.
A downturned market is more likely to make already risk-averse investors feel more pessimistic. Many will have knee-jerk reactions if numbers drop or their returns aren’t materializing quickly enough. It’s crucial investors have goals and strategies in place that aren’t driven by emotional decisions based on the state of the market.
One way the downturned market is specifically impacting investing is through multifamily assets. As large companies lay off workers and inflation increases, people can’t afford the rent rates they once could — much less higher rates caused by inflation and interest. Advisors expect apartment-focused investors to see lower returns as expenses rise.
Today’s investors are more tech-savvy and want to be plugged into the process. Many clients want advisors to provide them with access to portals where they can see their investment information and stay involved in the process without always having to go through their advisor for answers. With market volatility, it’s more important than ever before to have upfront, honest conversations — even when they are hard conversations about profit loss.
Clients want to know the truth so they can make informed decisions. They want to trust their advisors to help them make logical choices regarding their investments. Offering the conversation before they have to reach out and ask helps you create a trusting and honest relationship with your clients that is more likely to last.
Changing Labor Market
Hybrid and work-from-home models have caused many businesses to downsize their offices. As fewer people want to come in for work, the overhead has been cut drastically. For office spaces, this can often be solved by cutting larger offices into smaller spaces for multiple renters. Turnaround times for things like construction and electronics have been slowed down by material and labor shortages.
At the same time, advisors are seeing this same shift in how investors approach the client-advisor relationship. Many people want the option for a virtual or hybrid relationship. Advisors can increase their reach by offering virtual points of contact for clients outside of their local reach. For some clients, the hybrid approach is more valued because it allows them to visit face-to-face regularly and then connect virtually whenever it’s more convenient.
Aside from providing a portal and regular check-ins, it’s a good idea to provide monthly reports. While you might already be offering quarterly or annual reports, you may find clients are looking for more frequent updates. With modern technology, many people expect connections to be more available and responsive than ever before.
Offering a bigger overview each month helps clients feel as if you are being more proactive and staying on top of their accounts. With the right tools, most of your reporting can be automated so this isn’t a huge lift. Across all property types, an increased focus on transparency makes this a valued feature for investors.
One silver lining is the number of smaller operators who are overextending their costs. As businesses run into cash flow and capital issues, opportunities open up for patient players who are ready to act. For real estate investment managers, this can be a great time to pick up some new properties at a low price.
Sellers have been slow to change their perspective on their property value for the most part — many are still holding on and hoping for the prices they saw in 2021. For investors in all property types, it’s important to hold out and get better deals that make up for the high interest rates and inflated expenses.
Holding Long Term
It’s important to plan to hold investments for longer periods of time. The returns are unlikely to be fast, so investment managers have to play the long game. Investors sometimes want to see returns right away, but that reality is changing in a downturned market.
It’s important to think long-term in how you view your holdings, and that mentality means preparing for your worst day. Without the right approach, it’s easy to get overextended as the market changes. Advisors and investment managers have to know what they could face and adjust their strategies to prepare for those scenarios.
Finding the Right Partner
Finally, you need to find companies that can partner with you and help you scale your business despite the volatile market. AppFolio Investment Management helps real estate firms strengthen investor relationships by offering more visibility and accessibility for clients. Find out more by talking to our team and getting your free demo today.