Outlook for 2023
The past year was one of change. It is time to take stock of where we ended and what to anticipate in 2023. As a backdrop to our real estate survey, 2022 brought significant relief to the pandemic concerns, and a let down from the dramatically high residential performance of 2021. We also saw the highest inflation in 40 years and a doubling of mortgage rates.
With these economic conditions in mind, it’s not surprising that the results of the quarterly survey of the Kelley A. Bergstrom Real Estate Center’s advisory board members showed a continued decline in the outlook for the overall real estate market. While the outlook rose significantly in 2021, we gave back all the gains in 2022 (Figure 1). In fact, the recent outlook is lower than at the end of 2020.
Figure 1
Consistent with this outlook, responses to the question about expectations for next year’s level of business shifted from more to less. Notice the columns in Figure 2, the “less” category grew from low to high as the year unfolded and the columns in the “more” category fell from high to low. Roughly 60% of respondents expect to conduct less business during this year than last. The confounding response is shown in Figure 3, which reveals the opposite pattern in the previous figures. Here respondents shifted from anticipating hiring the same or fewer employees in 2022 to hiring the same to more this year. This is curious given the falling outlook for business growth.
Figure 2
Figure 3
The housing outlook changed dramatically in 2022. As the year started, demand was high and supply struggled to keep pace. The combination of pandemic concerns and low mortgage rates coincided with extreme competition for new and existing homes in 2021. Mortgage rates doubled from 3.2% to 6.4% during 2022, according to the St. Louis Fed, bringing a reversal in the outlook for housing. The first quarter columns in Figure 4 show strong-to-very strong responses but the fourth quarter columns are split between weak and stable. This reflects the impact of a slowing economy and doubling of mortgage rates. One respondent described home building going “from 153 closings in April/May to four in June/July and zero in August.”
Figure 4
Capital availability, both equity and debt, faded in 2022. First quarter columns in Figure 5a indicate most respondents believed equity availability was either growing or extensive at that time. By the end of the year, 46% of the responses of our board of advisors labeled equity availability as limited. Debt capital was not as aggressive as equity in early 2022 but the pattern in Figure 5b is similar. At yearend, 57% of responses suggested limited debt availability.
Figure 5a
Figure 5b
The sector chart in Figure 6 is a bit cluttered but the overall pattern is revealing as the variance among sectors narrowed in 2022. The year began with perspectives consistent with the past. Sector outlooks varied significantly with malls scoring a mid-2 and apartments just under 9. Since then, the range of responses has tightened, primarily due to the apartment sector dropping from 9 to 6. Office and mall sectors remain weak but the overall range narrowed. We might interpret this shift as an indication that the market is more uncertain today. As we become less confident in our sector views, our ratings tend to move closer together.
Figure 6