CRE Index Confirms Downturn But Indicates Higher Hopes for Future Conditions

The Real Estate Roundtable’s 2020 Q2 Economic Sentiment Index registered a score of 38, confirming a sharp downturn in market conditions.

According to the report, which measures views of CEOs, presidents and other top commercial real estate industry executives, any score above 50 is viewed as positive. The new score of 38 is a 14 point drop from the Q1 score of 52. This comes as the US is still grappling with the COVID-19 pandemic. With no industry spared, Real Estate Roundtable President and CEO Jeffrey DeBoer said the commercial real estate industry experienced a sudden onset of economic disruptions.

“The economic damage to commercial real estate has been particularly harmful for the retail and lodging sectors of the industry,” DeBoer said. “Although our Q2 survey results show there is hope for improved conditions within the next year, there are significant concerns that other sectors of the industry could be dragged down if jobs don’t rebound and government assistance tapers off.”

The report shows that an improvement in market conditions by 2021 will be dependent upon the return of jobs and ability to safely reopen businesses. Some of the difficulties for the industry include tenants not being able to pay their rent due to job losses. According to the latest numbers from the US Bureau of Labor Statistics, the unemployment rate is 13.3%.

“The fear is that business and residential tenants may be suddenly unable to pay rent beyond the sectors already impacted and struggling to come back,” DeBoer added.

Among other issues, respondents also reported the stay-at-home orders impaired their ability to accurately value commercial real estate assets, which has slowed real estate transactions.

One respondent stated: “We have been focusing on helping people pay rent and keep their stores and apartments. We haven’t had a lot of thought going into growing and developing new properties.”

As previously reported by GlobeSt.com, Real Capital Analytics found that many investors are making the choice to sit on the sidelines when it comes to making CRE deals. And Real Estate Roundtable’s report also found respondents believe there is plenty of equity capital on the sidelines but without price discovery, there’s an unwillingness to invest in the market.

But there is optimism for the future. Along with the Q2 Overall Sentiment Index, the report gives a Current Conditions Index, which dropped to 13. But the Future Conditions Index is 62, which is higher than Q1′s score. The difference between the two scores shows there is optimism after the pandemic has run its course.

DeBoer says his association is encouraging Congress to create a temporary assistance program to help residential and commercial tenants meet their rent obligations.

“Such a program will assist CRE executives cope with the current dive in market conditions until an eventual medical solution can underpin renewed economic growth for individuals, businesses and the country,” DeBoer said.