Keep in mind that when we posted our 2023 predictions, the 10-year treasury was 3.5%, transaction volumes totaled $400+ billion (3x higher than current volumes), and apartment/industrial cap rates were in the low 4% range. Lots has changed.
Overall, it was a pretty strong year for our predictions...
Prediction 1: Property values fall by 10-20%
What we said last year:
Real estate values get hit hard when interest rates go up, so it’s no surprise that property values are falling. Publicly traded REITs led the way in the second half of 2022 and have fallen by more than 25%, but private funds have been slow to recognize these declines. Value declines have already come to the public markets, and they are currently working their way through the private markets.”
What happened in 2023:
Researchers have different approaches to measuring value shifts, but there seems to be a consensus around an 11% decline in values over the last 12 months. Peak-to-trough declines vary more considerably.
Prediction accuracy
Prediction 2: $30B of “gated” equity piles up in private real estate funds
What we said last year:
Open-ended real estate funds tend to focus on core, bond-like real estate. Investors are okay with parking their money in these funds when they expect steady income and decent appreciation over time, but when markets turn many investors get spooked and want out. Letting them out en masse pushes down values, which is bad for remaining investors. Therefore, fund managers reserve the right to “gate” equity departures. We think these gates will fly up in 2023, leading to a build-up of more than $30B of equity queues at Blackstone, Starwood Property Trust, JLL Income Property Trust, Ares Management Corporation, and National Council of Real Estate Investment Fiduciaries (NCREIF)'s ODCE funds.
What happened in 2023:
As of November 2023, the redemption queues of ODCE funds reportedly total about $35 billion (per brokerage community rumors), and the queues at non-listed REITs managed by Blackstone and Starwood total another $1 billion, for a total of about $36 billion. Notably, JLL Income Property Trust and Ares have been fulfilling 100% of their redemption requests.
Prediction accuracy:
Prediction 3: 100K+ technology job losses
What we said last year:
Amazon, Meta, Apple, and Google added nearly 2 MILLION jobs over the last 15 years, and more than 40% of the jobs (about 900,000) were added in the last 36-48 months. There will be increasing investor pressure on these firms to reduce costs to grow income as their valuation multiples come down. We estimate that about 60% of those jobs are relatively high-paying professional jobs, and they've been concentrated in a handful of key U.S. tech markets such as San Francisco, DC, and Austin.
What happened in 2023:
Prediction accuracy:
Tech firms aggressively downshifted in 2023. The pace of cuts moderated as 2023 progressed, but total cuts far exceeded our baseline estimate of 100K. You can see a full rundown on tech job losses in 2023 here.
Prediction 4: More workers go back to the office
What we said last year:
...according to Kastle Systems card swipe data, 40% of cards were being used a year ago, 50% are being used now, and we think it will reach 60% next year. New York and San Francisco will be the biggest beneficiaries, and we think we’ll see a lot of headlines about the resurgence of urban environments in 2023.
Sidenote: Card swipe data is an effective way to see how many people are in the office, but it wasn’t a widely published dataset pre-Covid, so we don’t really have a good baseline of what’s normal. Has any firm ever had every single person with an access card in the office at the same time? Doubtful. If the baseline is something like 75% instead of 100%, 60% card capacity would say that 80% of workers are back to the office.
What happened in 2023:
Prediction accuracy:
We were too aggressive here. Some anecdotes suggest we're on an upward trend (i.e., commuter ridership, peak attendance is up meaningfully, etc.), but return-to-office stalled in 2023. We missed this one.
Prediction 5: Lowest debt originations in a decade
What we said last year:
There are five types of real estate lenders: Banks, insurance companies, CMBS, agencies, and debt funds. Banks, CMBS, and debt funds are on the sidelines and probably won’t open up much until at least mid-2023. Insurance companies and agencies are open, but they are selective, and there’s very little demand from borrowers for long-term fixed-rate debt at today’s rates. Debt markets will eventually thaw, but it’ll likely be slow until they do. We think we’ll have the slowest debt year in a decade with less than $50 billion of CMBS in 2023.
What happened in 2023:
Mortgage production was down 53% in 2023 according to the Mortgage Bankers Association.
We thought CMBS production would come in less than $50B in 2023, and it's on pace to land around $40B, the lowest production level in more than a decade.
Prediction accuracy:
Prediction 6: Blackstone buys a big REIT
What we said last year:
REITs are down across the board, but office REITs in particular are discounted: Down 30% this year—trading 20% to 60% below what their assets are worth in the private markets—with 8% implied cap rates. Since CEO disposition has a lot to do with a firm’s willingness to sell, guessing about specific companies is inherently random. It’s a lot easier to guess who the likely buyer will be. Blackstone has been involved with 1 of every 10 REIT M&As (all time), and they’re sitting on $60 billion of dry powder. Similarly, Brookfield Asset Management just raised a $17 billion fund and is already a big office owner. But we see Blackstone leading the charge in 2023.
What happened in 2023:
Nothing! High interest rates suffocated deal activity.
Prediction accuracy:
We underestimated two drivers: 1) the pace of interest rate increases and 2) the uncertainty and severity of investors' spite for office.
But we think these moves had more to do with cost-cutting and less to do with genuine succession planning. A good example of the type of move that we thought we’d see more of in 2023 was Michael Dardick’s well-choreographed succession after a long career at Granite Properties. We continue to think we’ll see more departures akin to the path of Dardick and Kilroy in the coming months and years, but it would be a big stretch to say that 2023 was the start of this trend.
Prediction accuracy:
Prediction 9: Cracks in the multifamily armor
What we said last year:
Investing in apartments has consistently generated 15%+ returns over the last several years, but several challenges could make continued outperformance unlikely. Rent growth has slowed from 10%+ to 3%, population growth and household formations are slowing meaningfully, nearly 1M units are under construction and will likely push the national vacancy rate over 10%, property taxes and insurance are increasing at above-inflationary levels, and cap rates are increasing. Unfortunately, markets with high cost escalation also tend to have the largest construction pipelines. Oh, and if you’re one of the country’s largest managers, there’s a decent chance you’ll be involved in a class action lawsuit about your rent pricing software in 2023.
What happened in 2023:
We didn't get the call perfectly, though: We said multifamily vacancy could get to 10% and now it looks like it will likely peak around 7-8%.
However, we’re proud of this call because it ran counter to the overwhelming narrative that multifamily was an untouchable asset class.
PWC’s Emerging Trends in Real Estate survey was published shortly before our 2023 predictions and had multifamily ranked as a top investment prospect, meaningfully ahead of every product type except for industrial.
Why this matters: Multifamily is the largest CRE subsector, by far, and roughly 30-40% of the subsector traded near the peak of the market, often with substantial debt. More to come in our 2024 predictions…
Prediction 10: Co-working finally faces the music
What we said last year:
…we think 2023 will be the year WeWork tries to rip up many of the leases it signed over the last decade. The firm is fighting for survival under the leadership of Sandeep Mathrani. Softbank famously valued WeWork at $47 billion in 2019. WeWork kicked the can after the Adam Neuman debacle by SPAC-ing into a $9 billion company, but the firm is burning cash. It will be difficult for WeWork to kick the can beyond 2023.
What happened in 2023:
Prediction accuracy:
Everyone has WeWork fatigue, but we track it closely because it's meaningful for the office market, particularly in New York. Coworking is here to stay, but our predictions of WeWork's cash burn were accurate. WeWork filed for bankruptcy in early November.
From WeWork's bankruptcy announcement:
WeWork has a deliberate and value maximizing lease rejection plan that is expected to position the company for operational and financial success. As part of today’s filing, WeWork is requesting the ability to reject the leases of certain locations.
WeWork's new CEO, at the time of the bankruptcy, said: “Now is the time for us to pull the future forward by aggressively addressing our legacy leases and dramatically improving our balance sheet.”
Final grades on our 2023 predictions
Best 2023 prediction: Cracks in the multifamily armor
Worst 2023 prediction: Blackstone buys a big REIT
We'll be releasing our 2024 predictions in the coming weeks. Stay tuned, and let us know if you have any suggestions!
In the meantime, we're also gearing up for our next FastTrack course that kicks off on January 10. Apply on our website if you're interested. A network of 600 alumni who say the class is worth $25K (on average), 90+ NPS, all word-of-mouth referrals, and a money-back guarantee.