Q3 2022 Market Report: Finding Opportunities in an Environment of Uncertainty

Executive Summary

• The market remains uncertain - with mixed indicators on GDP, inflation, and interest rate opening up new opportunities for commercial real estate investors
• Many expert opinions remain divided, presenting both positive and negative signals
• High inflation remains the prime concern, although recent signals are positive. HoneyBricks continues to advocate for allocations to real estate to hedge against inflation
• A recession may be on the horizon and much of the institutional multifamily investment industry has paused or dramatically slowed its acquisitions activity

Brief Highlights

• Global: Geopolitical and monetary policy forces have contributed to a dynamic environment in which even the highest level projections are seeing downgrades. In late July, the International Monetary Fund (IMF) revised its baseline forecast to 3.2% for 2022. In July 2021, this same estimate for 2022 was 6.1%.‍

• United States: GDP and GDI figures underscore a theme of uncertainty as, in concept, the two should be equal. US Real GDP decreased at an annual rate of -0.6% for Q2 2022, while US Real Gross Domestic Income (GDI) grew +1.4%. ‍

• Multifamily Real Estate: pricing, anecdotally, has experienced a 10-15% decrease from its highs earlier this year. In response to macroeconomic uncertainty, inflation and, particularly, interest rate hikes, much of the institutional multifamily investment industry has paused or dramatically slowed its acquisitions activity. ‍

• HoneyBricks: Investment activity has been selective in response to the current environment. Our selections displayed superior rent growth with HoneyBricks paying particular attention to demand fundamentals at this time. HoneyBricks has reviewed 119 opportunities thus far in Q3 2022, and chosen to invest in 2 of these (1.7%). 

The Recession Discussion

Debates over whether the US economy is currently in a recession have dominated the news since Q2 2022. Economists and pundits are pointing to a litany of indicators in an attempt to grasp the situation. 

We aggregated these data points to help summarize key metrics and some recent thoughts from experts:

The Negative Factors

The Positive Factors

Specifically important to multifamily investment is the near term movements in borrowing costs and the health of the job market. We monitor the conditions of these factors closely in normal times, and especially so in times of uncertainty.

Opportunities in Disruption

Most investors are aware that times of disruption often represent great opportunities for outsized performance. 

The HoneyBricks investment committee reviews a tremendous number of opportunities and through our team’s efforts in Q3 2022 we have seen:

• Rent growth: continues to be strong, in most cases outpacing inflation;
• Rental demand: continues to be a more economic alternative to homeownership;
• Occupancy: remains elevated (95%+) in most cases;
• Affordability: is mixed, with many business plans pushing up against the 30% rent/income ratio HoneyBricks uses as a litmus test;
• Townhome product: is “in vogue”, playing to the pandemic and post-pandemic theme of greater work-from-home flexibility;
• Dead deals: An increased number of potential transactions being dropped due to missed price expectations; and,
• Market slowdown: in investment activity that has led to transactions occurring at pricing discounts of as much as 10-15%, relative to whisper.

There is no substitute for a large sample set when selecting opportunities, especially in times of uncertainty and rapid change.