CRE Sentiment Sour at Worst, Tempered at Best

Two commercial real estate surveys released separately about economic sentiment in Q4 2021 reflected declines from earlier periods.

The CRE Finance Council (CREFC), an industry association that represents the $5 trillion commercial and multifamily real estate finance industry, said its quarterly Sentiment Index overall sentiment dropped sharply for the second consecutive quarter in 4Q 2021 to 105.2.

In Q2, it hit its all-time sentiment high of 119.2 in 2Q 2021 (100 is equilibrium).

RCLCO’s Real Estate Market Sentiment Survey at year-end 2021 showed the RMI at a more tempered sentiment of 82.1 as new variants have emerged in the second half of the year that are more transmittable and vaccine-resistant and as concern about inflation increases.

After a big drop in 2020 due to COVID-19, market sentiment spiked to 89.1 in mid-year 2021, RCLCO reported, as vaccination rates rose, new cases dropped, business restrictions were lifted and the economy and real estate markets started to recover.

What CREFC Is Seeing

CREFC said that the primary driver for the change was a meaningful shift in the outlook for the US economy in 2022. The 4Q 2021 survey indicated only 27% of the Board expects the economy to perform better, down from 67% in 3Q 2021. Additionally, 35% of the Board expects the economy to perform worse, up sharply from only 9% in 3Q 2021.

A secondary component for the change was expectations for investor demand for CRE and multifamily equity over the next year. The 4Q 2021 survey indicated 54% expect more demand for CRE assets, down from 82% in 3Q 2021 and 80% in 2Q 2021. 

To the good, as with the prior quarter, only 3% expect less demand. Sentiment for all CRE finance businesses moderated from the preceding quarter. Still, it remained strong, with 62% of the Board having a positive outlook over the next 12 months and only 5% holding an unfavorable view.

What RCLCO Is Seeing

For RCLCO, respondents predict that real estate market conditions will continue this gradual decline, with the RMI anticipated to drop 13.1 points to 69.0 over the next 12 months. This would bring sentiment in line with average levels over the past 10 years.

Just over half of survey respondents (57%) believe real estate conditions will remain moderately or significantly better in the next 12 months.

A majority of respondents believe Covid-19 will cause a reduction in long-term office demand compared to pre-Covid estimates, with 41% predicting a 10-20% reduction, followed by 36% predicting a slight 0-10% reduction.

The apartment market boom will continue for at least another year—nearly half of the respondents indicated apartment rent growth would remain somewhat above historical levels (5% to 8% growth) in 2022.

Respondents indicate that many product types have moved from Early Recovery to Early Stable phases since an earlier 2021 survey. Retail still remains at the bottom of the cycle due to ongoing disruption from Covid-19, though both office and hospitality have reached early expansion. Encouragingly, retail is expected to return to Early Recovery within the next 12 months.