At this time last year, we were debating whether the inflation spike was just a short-term response to the rapid recovery of the economy, or were we entering a concerning period of systemic inflation after decades of low interest rates and stable prices?

Turns out those who predicted longer-term, painful inflation along with Federal Reserve–induced higher interest rates were right. Now the debate has moved to 2023. Will the Fed send us into a recession as it tries to tame rising prices? If yes, will it be a short-term soft landing, or a deeper, harsher crash? If no, will we continue to have significant growth, or will we be looking at a stagflation situation — not a recession, but not a growth environment, either?

To set the jumping-off point for 2023 speculations, we need to look at where we are today, which is a decidedly mixed bag. The monthly percentage rise in inflation seems to be moderating, even as rents and energy costs continue to climb. The Fed is at risk of pushing the economy into recession with a record pace of federal fund rate increases, but unemployment is still at a record low, and corporations are still reporting substantial profits. Recessions rarely materialize when the populace is fully employed and corporations are thriving. In addition, despite layoffs in the tech industry, new job growth is still solid.

So, what does that portend for 2023? Depends on who you talk to.

According to a basket of agencies — the International Monetary Fund, the United Nations Department of Economic and Social Affairs, the Organization for Economic Co-operation and Development, the European Commission and the U.S. Department of Agriculture, among others — the U.S. CPI inflation rate should fall to between 2.8 percent and 3.5 percent by the end of 2023. As of Sept. 30, 2022, the annual rate before adjustment stood at 8.2 percent. All of the agencies expect the CPI-based inflation rate to return to the Fed’s target 2 percent in 2024.

That’s good news, but how we get there might not be. Consensus forecasts among economists and financial pundits predict the United States will be in recession in early 2023, which will, of course, bring down inflation. But how severe the recession will be is less clear because so much of the economy remains strong.

“The interesting backdrop is that while volatility and distress have clearly hit the financial markets, Main Street has yet to be impacted at the same magnitude,” says Rich Ratke, managing principal at Walton Street.  “While home mortgage rates have risen significantly and inflation has spiked — for example, meaningfully higher energy and food costs — unemployment remains at record-low levels. However, if inflation and high borrowing costs were to push the economy into a prolonged recession with a material increase in unemployment, both U.S. property markets and corresponding credit markets would likely continue to deteriorate beyond current levels.”

Most economists and financial experts believe the recession — if there is one — will be relatively mild and short-lived. With corporate profits still growing and unemployment low, they believe the United States is well positioned to withstand a slowing economy that corrals inflation and then bounces back.

Hessam Nadji, president and CEO of Marcus & Millichap, holds that the current bank funds rates are actually within the normal range, but that the rapid pace of the Fed increases has created a disconnect, where investors perceive there to be more urgency and danger than actually exists. “The difference this time around is that you have very strong fundamentals plus pent-up demand of capital. The operations side continues to do very well. Any recession to come is likely to be fairly shallow.”

Economist Nouriel Roubini, however, who correctly predicted the 2008 financial crisis, sees a “severe, long and ugly” U.S. recession that could last all of 2023. As a result of that long, ugly recession, he expects corporations and shadow banks, such as hedge funds, private equity and credit funds, to implode. His reasoning is based on the large debt ratios corporations and governments are carrying. As interest rates rise, these entities are going to struggle to survive. Roubini also notes that achieving a 2 percent inflation rate without a hard landing is “mission impossible.” He expects the funds rate to reach 5 percent before the agency backs off.

On the other end of the spectrum is Christopher Thornberg, director of the Center for Economic Forecasting at the UC Riverside School of Business, who has co-authored a report refuting the general belief that a recession is unavoidable.

“Although there are signs of stress in parts of the economy, the wealth created by the excessive fiscal stimulus enacted in 2020 and 2021 continues to drive a consumer consumption binge that will propel the economy forward,” Thornberg wrote. “The only possible thing that could tip things downward in the near-term is if the Fed applies even more aggressive quantitative tightening to control inflation than they’re now projecting.

“This is now a balancing act,” continued Thornberg. “Functionally speaking, policymakers went from maximum acceleration — the stimulus — to maximum braking — tightening by the Fed — over a single year, something that would create turbulence in even the healthiest economy.”

All of this known uncertainty (economy will be volatile whether we go into a true recession or not) and unknown uncertainty (what will be the outcome of the Russia-Ukraine conflict? What is OPEC doing with oil prices? Are we seeing the beginning of a tech bubble burst?) is causing investors and managers to hit pause after two years of outstanding returns.

The NCREIF Property Index recorded a return of 21.5 percent for the four quarters ending in June 2022. But everyone knew that couldn’t last. The 43 economists and analysts surveyed in October 2022 by ULI’s Center for Real Estate Economics and Capital Markets expect total returns to drop to 3.8 percent in 2023, and recover to a moderate 7 percent in 2024. That is to say, more normal returns.

Real estate property transactions have already begun to decline, primarily because buyers and sellers cannot agree on pricing due to heightened market uncertainty. Rising debt costs and restrictive underwriting standards are also limiting transaction volumes.

All of this uncertainty means that 2023 will likely be a year of caution, as investors position themselves to take advantage of opportunities as we come out on the other side. And the best opportunities in 2023 and beyond might not be in the traditional real estate arena.

Real assets are often touted as a hedge in uncertain times, but that doesn’t mean they aren’t still vulnerable to downturns, and it doesn’t mean that every sector is a safe haven. The industrial market, for example, has seen unprecedented demand growth that has pushed rents far above prior records. However, the sector seems to be cooling. Ecommerce is slowing and giving back some of the market share it captured from physical retailers during the pandemic, resulting in less need for additional warehouse space. Amazon has delayed or canceled plans for at least 13 facilities in 2022. Other major retailers also have been cutting back their distribution expansion plans. Industrial still sits at the top of the investor list, but investors have lowered their return expectation for the coming year, according to Emerging Trends in Real Estate 2023, an annual survey produced by PwC and the Urban Land Institute.

Yet, as some stalwarts are slowing, some of the hardest-hit sectors of the pandemic may stage a comeback in 2023. “The outlook is generally positive, especially as travel and tourism rebound,” says John D’Angelo, U.S. National Real Estate Leader at Deloitte. “Senior housing is also bouncing back. The long-term trend points to great fundamentals for senior housing and senior care.”

The office sector might also be staging something of a comeback. “Some of the largest companies are buying office buildings in anticipation of job growth and very little overbuilding,” notes Nadji.

And 2023 will find investors still seeking solace in the multifamily sector. “Multifamily is a great place to be,” says Willy Walker, chairman and CEO of Walker & Dunlop. “Rents will continue to go up, and Freddie and Fannie provide liquidity that isn’t found in other sectors.”

For those who want to venture outside real estate, the Northern Trust Capital Market Assumptions: 2023 Edition makes the case for commodities. “With the inflation surge, inflation-sensitive real assets play an increasingly key role in a diversified portfolio. We expect all real assets to perform well over five years, but surging commodity prices because of shortages make natural resources particularly attractive.” In support of this prediction, the report notes that supply chain disruptions and demand to secure critical resources to support regional rebuilding blocs should support natural resources’ prices. Further, reduced investment in commodity production has underpinned tight commodity markets for years now, reducing supply as demand is growing.

While some investors are cautiously looking for places to commit their capital in 2023, others are using the time to pause and regroup while they wait for the future to become clearer. However, they aren’t just playing Wordle or trying to figure out what to do with the unused air fryer sitting next to the unused Instant Pot. They are using 2023 to begin positioning for the investments in areas that might not have previously existed. 2023 might become known as the year that real assets investors began to take net zero seriously. Decarbonization will radically change some industries, and with this seismic change will come new and profitable opportunities for those prepared to access them. In its report, Spotting green business opportunities in a surging net-zero world, McKinsey & Co. has identified eight industries that will be highly affected by the need to decarbonize. Most of the industries would fit directly into a real assets portfolio, while all are at least tangentially related to real estate, land, construction and/or infrastructure. Managers who want to incorporate net-zero-friendly industries and companies into their portfolios could find themselves early winners as investors move to support decarbonization principles.

The industries McKinsey selected as those most likely to be impacted by net-zero changes and, therefore, most likely to provide new investment opportunities include:

• Fossil fuels: Implementing a net-zero scenario would significantly cut the use of fossil fuels, disrupting an industry that has powered portfolios, along with cars and buildings, for decades.
• Power: Sustainable, net-zero-friendly power sources are improving at an exponential pace, but unlocking their investment value may depend on managing volatility and dispatchable capacity, as well as the rising costs of electricity.
• Buildings: Net-zero builders can create value by investing in next-generation technologies, replacing equipment with low-emissions models and improving energy efficiency.
• Cement: The second most-used material on earth after water, according to Chelsea Heveran, an assistant professor at Montana State University. For cement companies and their value-chain partners, opportunities for value creation could arise as customers look for low-emissions building materials.
• Steel: Early adopters who move quickly to decarbonize their operations may be better placed to capture new market opportunities in the long term.
• Food and agriculture: To capture value from the net-zero transition, food and agriculture leaders will turn to efficiency enhancements, carbon sequestration and alternative proteins.
• Forestry and other land use: Stopping deforestation will be critical to halting climate change. Natural climate solutions could provide new lines of revenue as the world’s carbon markets mature.
• Road mobility: In a net-zero economy, low-emission cars and trucks would own the roads. For vehicle manufacturers, that would mean big shifts in capital spending and employment. For toll road operators, it could mean investment in EV charging stations and other infrastructure to support a new generation of vehicles.

What 2023 will hold for real assets managers and investors is anyone’s guess. There are simply too many moving parts and variables to predict outcomes with any certainty. However, the consensus among respondents in the Emerging Trends in Real Estate 2023 survey is that of cautious optimism that real assets will ride out any near-term slump and be well positioned for another period of sustained growth and strong returns in the years to come. Yet, it is possible that we will see another GFC-like recession with pain lasting for years.

Until the crystal ball is clearer, investors are likely to move to the sidelines. But they won’t be just waiting. After every recession, the markets have come back stronger than ever. The investors and managers able to take advantage of that comeback will be those who prepared for the new opportunities during their 2023 hiatus. They might be cautious today, but they’ll be ready to move when the time is right, whether it’s into traditional real estate, another real asset or one of the new opportunities opening up behind the push for net zero.

Sheila Hopkins is a freelance writer in Auburn, Ala.