As we move into 2023, the real estate development and construction industry is poised for significant growth and innovation. As urbanization continues to drive demand for housing and commercial space, the industry is also adapting to changing needs and preferences of consumers.
According to the Construction Confidence Index by ABC, contractor morale continues to be positive as of November. Economist Zack Fritz reports that 60% of contractors plan to expand their workforce over the next six months, while only slightly over 10% anticipate staff reductions. Additionally, approximately 50% of contractors project sales growth, while around 20% predict a decline. FRED (Federal Reserve Economic Data) reveals a 19.5% YoY decrease in new privately owned housing units starting in the first two months of 2023. However, this decline is not necessarily negative news, as the upward trend in construction costs experienced in 2021 and early 2022 has reduced significantly. Developers were asked whether they observed any changes in deals repricing over the past three months. The results indicate that 47% of developers witnessed upward repricing, a decrease from 92% in March 2022; 21% reported downward repricing, while none did in March 2022; and 14% of developers noted no repricing, compared to 5% in March 2022.
When examining construction expenses, it can be noted that the cost of materials has declined from its high in early 2022. However, a significant decrease in construction costs is doubtful; rather, we should anticipate price pressure in 2023 and possibly 2024 before prices stabilize and begin to climb steadily. The recent turbulence amongst regional banks could increase uncertainty surrounding higher interest rates. This is likely to cause a shift towards a more onerous regulatory environment along with a tightening of loan availability. In many areas, the rate of rent rise has slowed or even reversed. Given the potential delivery of about a million additional rental homes, we anticipate this condition to continue until 2023. However, since there is still an imbalance between supply and demand, these new units will ultimately be consumed. Coupled with a decline in medium-term deliveries brought on by the current slowdown, rent growth will then resume in 2024 and carry on in the future.
Commercial construction is facing many headwinds during this time. Given the negative consequences of remote work, office development is anticipated to fall in 2023. The demand for physical stores is still being influenced by the rise of online purchasing. This, however, may not entirely be a bad thing. According to leading reports, the need for data centers, a subsegment of the office construction market, will continue to grow in 2023 as a result of increased online purchasing and home-based employment.
While recession remains a remote probability, experts believe that if it does occur, it will be moderate. While we see a rocky short-term prognosis, it may be just what is needed to strengthen fundamentals over the long term and retain the risk-adjusted returns that drive the multifamily investment strategy. All in all, there are still numerous opportunities for growth and to turn a profit in 2023 and 2024.
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