CRE Will Avoid Worse-Case Scenario, Survey Finds

The Trepp 2022 CRE sentiment survey wasn’t a pile of doom and gloom. It found a “prevailing sentiment is that a variety of adverse conditions will impact business, but [that] commercial real estate and the broader financial markets will avoid worst-case scenarios.”

The poll received several hundred replies with half of respondents in commercial real estate, and others coming “from banks, capital markets/structured finance, and academia.” Although the respondents thought that CRE and broader financial markets would “avoid worst-case scenarios,” there were a number of concerning expectations.

The first is a financial impact. “By a ratio of more than 10:1, respondents predicted that CRE and CMBS delinquencies would rise over the next six months,” the report said. “This would be a reversal of the overall trend of a declining CMBS delinquency rate for 23 of the last 25 months. Not surprisingly, inflation, higher interest rates, and supply chain constraints were the biggest macro concerns in the survey.”

More than half thought CRE fundamentals would fall some in the next six months, but only 6% expected them to be significantly worse.

About 75% thought that net effective rents would decline and 25% expected the drop to be severe. Who would see the biggest fall? Office, which would see an upturn in the amount of distress property.

Most—slightly under 75%—said their businesses were unchanged or growing compared to last year. Close to 90% said their companies were at least keeping current headcount if not doing additional hiring.

But, overall, most are expecting a recession: 25.1% by the end of this year and 59.3% sometime in 2023. The top five concerns were inflation (70.8%), higher interest rates (59.7%), supply chain constraints (36%), labor retention (28.8%), and regulation (22.3%). Also, 63.1% expected a negative impact on their businesses from interest rates.

Respondents saw better times in leasing ahead than in sales. Just under 46.8% expected CRE sales activity to “drop significantly, while the remainder thought it would either improve or remain the same, with about 14.2% unsure.

Leasing was seen as in a better position, with 48.5% expecting it to stay the same or improve, 10.3% unsure, and 38.2% looking to a significant drop.

Office was the overwhelming pick for occupancy to drop while half of people expect multifamily occupancy to increase. Given that, it shouldn’t surprise that office was also seen by most as facing falling net effective rents, and most think net effective rents will increase in multifamily.