I want to wish you all a ‘Happy! 2023?’. The unorthodox punctuation is deliberate: It shows my uncertainty and conviction. I am both enthusiastic and uncertain. Which reflects the year we’re about to enter: prepare for 2023 to be a year of confusion.
It would be nice to remove the question mark, so what is certain amid the uncertainty? Despite all the spreadsheets, models, big data, indexes and even metaverses, there are only three easy concepts to understanding commercial real estate that will get you through 2023: location, location, location; interest rates; and quality.
Location stayed in the same place, but interest rates relocated. During 2022, the US Federal Reserve raised interest rates 425 basis points and the Bank of England raised interest rates 325 basis points. Interest rates drive real estate pricing. US interest rates are currently 18 times higher than they were at the start of 2022. With a federal increase of at least 75 more basis points expected on the horizon, there is no visible decrease in sight.
The impact is troubling. The very nature of such an increase in the cost of capital and the uncertainty about the ultimate rate changes the behavior of institutional investors. We see general partners desperately searching for capital as increased debt costs drive away anxious limited partners. A wave of withdrawals has hit Blackstone’s seemingly impenetrable real estate investment trust. While Blackstone still has plenty of capital, the volume of withdrawals shows less concern about the firm’s underlying assets and more that allocators’ increasingly expensive capital has just become even dearer.
”Quality office space has been consistent—in bull and bear markets, it remains a good investment.”
However, as in years past, quality will win in 2023. This is where uncertainty makes me happy. The well-trodden path of ‘flight to quality’ is the direction of travel within uncertain times. Going back to basics: a good building or a fabulous resort or a one-of-a-kind location will still make investors happy.
The prime office market is exclamation-point worthy. No matter what year it is, my view on quality office space has been consistent – in bull and bear markets, it remains a good investment. Now there is tailwind – or rather a shove – from major players (thank you, Disney and Goldman Sachs) to get back to the office. Once again, nice office space and good managers will make the value of prime office space increase in 2023.
Speaking of happy, one heavily researched idea that I’ve borrowed from the Harvard Grant Study of Happiness is that the key to happiness is relationships. Taking the liberty of applying it to real estate, it is not a stretch to say that bringing employees together in quality office space will generate relationships. It certainly has for me. Better office space influences culture. The better the energy, creativity and learning in a space, the better the relationships – and the better the business.
So, to return to my punctuation predictions: ‘Happy! 2023?’ Despite more bad news coming, rates continuing to rise, the dollar strengthening and the market probably declining even more, let us take a moment to be happy. In 2023 I am as grateful as ever for the relationships I have developed across my 30-year career! Happy and healthy 2023 to all the people I have been lucky enough to work with, to my current colleagues and to the friends that I haven’t made yet! Thank you! No question marks on that one. We can end 2023 better than where we started, especially if we do it together… in a well-located, high-quality office.
Ellen Brunsberg is chief investment officer of Cain International
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