How Different Types of Investors View the Market
In a tumultuous market, different types of investors need to ask themselves, what is the most effective investment strategy to increase returns and secure capital. In 2023, private investors and REITs are entering the commercial real estate market with different viewpoints but are seeking the best opportunities in the market. What assets and opportunities are private investors looking for in 2023 compared to REITs?
REITs vs. Private Real Estate
While private investors have more asset control, potential tax benefits, and a weaker correlation to other financial assets, they usually face more risk, as their capital is more concentrated and less liquid. In addition, private owners often secure more management-intensive assets and possibly are less cost-efficient.
REITs tend to have more liquidity and can trade on major stock exchanges, offering several benefits to investors. REITs view investments as more diversified, cost-efficient, and less risky compared to private investments. REITs often have a low investment threshold, whereas private real estate investments typically have a greater minimum because fewer people participate per project. REITs are priced daily, precisely like stocks, and so have a high correlation to the macroeconomic market.
2023 REITs Outlook
The market took a turn in the second half of 2022 compared to the first half of the year. Currently, REITs are trading at substantial discounts, with tailwinds that could materialize in 2023.
What hurts REITs the most is the anticipation of interest rate spikes, so if the Fed stabilizes rates in the upcoming months, performance could improve. Significant interest rate hikes seen in 2022 are not expected in 2023, with experts predicting mortgage rates to moderate between five and six percent for the year.
REITs have historically outperformed private real estate. Experts predict that REITs will invest more in this economic market because they can withstand headwinds more than a private investor can due to more significant capital, security, liquidity, and more.
2023 Private Investor Outlook
The current market is more challenging for private investors to secure financing due to the cost and availability of capital. Investors should also be wary that market experts expect private equity to navigate rough times during the first half of 2023. These difficult times are exemplified by weak economic activity, challenging political environments, and tight credit markets, all pressuring current market valuations and slowing investment activity.
In this economic environment, private investors are looking for something with less of a startup, so they do not have to worry about obtaining a hefty number of finances.
Asset Types REITs and Private Investors are Looking at Buying
Private Investors:
As of 2023, private investors are targeting assets that will hold their demand, such as industrial and multifamily. Interest rates did not significantly impact overall industrial sales volume for 2022, making it an attractive investment for private investors. Total industrial sales volume for 2022 reached $106B across the U.S., with the average price per square foot coming in at $157, an increase of $19 year-over-year. Regarding multifamily, national rent growth is still at a record high of 6.6 percent and is holding steady. The multifamily sector is changing, but continued rent growth and rising interest rates are playing in the market’s favor.
REITs:
Most REITs specialize in one property type, but some have a diverse portfolio and can more easily invest in markets that private investors cannot afford. In addition to favoring multifamily and industrial properties, institutional investors also exhibit interest in non-gateway markets and alternative property sectors and are investing throughout the risk spectrum. They acknowledge that, with the exception of offices, the fundamentals of the commercial real estate sector are still going strong. Top contenders, including industrial properties, are not reacting negatively to rising interest rates or inflation. The hospitality industry is performing well thanks to revenge travel, while build-to-rent communities and mixed-use properties are growing in popularity. Additionally, many investors support value-add because they anticipate opportunities to arise to profit from specific market stress or distress, such as the requirement for recapitalization or gap equity.
Potential events in the upcoming year that could assist REITs in closing the current valuation deficit include a slower pace of interest rate hikes, corporate earnings above market expectations, and the prospect of mergers and acquisitions providing a floor for prices.
