Most CRE Pros Believe Office Sector Has More Distress Ahead

A whopping 70% of CRE professionals recently surveyed by Trepp say they think the office sector will see the biggest uptick in distress for the remainder of the year, and 83% said CRE/CMBS delinquencies will worsen over the next six months.

Overall, “the prevailing sentiment is that a variety of adverse conditions will impact business, but commercial real estate and the broader financial markets will avoid worst-case scenarios,” Trepp analysts write in an analysis of their 2022 CRE sentiment survey. “When asked about the current conditions of the markets, most respondents indicated headwinds were outpacing tailwinds. More than half said that economic conditions and higher interest rates would impact their businesses negatively…Not surprisingly, inflation, higher interest rates, and supply chain constraints were the biggest macro concerns in the survey.”

Participants in the survey were more optimistic about leasing activity versus sales activity, with more than half of the audience saying CRE fundamentals will be somewhat worse over the next six months but just 6% saying conditions would be significantly worse.  Three-quarters believe net effective rents will decline, with 25% of those saying the decline will be severe. And nearly 53% say CRE fundamentals will worsen somewhat.

Office is the sector respondents think will face the most distress in the coming months, coming in with 70%, followed by retail, lodging, and multifamily.  Respondents also believe industrial will begin to show cracks this year.

Responses to the survey also indicate more general challenges on the horizon for businesses, with 88% of respondents reporting they are either keeping their current headcount or simply hiring as needed. More than half of respondents say they think general economic conditions will negatively impact their business by the end of the year, with 62% saying interest rates are negatively impacting their operations currently. And nearly 60% say a recession is likely to happen by 2023.

The top five concerns among respondents were inflation (70.8%), interest rates (59.7%), supply chain challenges (36%), labor retention (28.8%) and regulations (22.3%).