CRE Investors Brace Themselves for More Inflation and Then Recession

It’s been a long, strange trip since the earlier part of 2022, according to new survey research out from Lightbox. From a relatively rosy outlook on the markets months ago, things have taken a turn in keeping with changing clocks and in plunging into a land short on natural light.

Yes, the immediate future is looking rather dim, and many in CRE investment are worried. “Nearly 70 percent of respondents to this LightBox Investor Sentiment survey characterized themselves as either concerned or bearish about the commercial estate market for the balance of 2022,” the report said. The split was 56% concerned and 34% very concerned; 10% weren’t concerned at all.

Leading into the dual concern was a trifecta of factors that those in the industry saw as the biggest threats to CRE: rising interest rates, inflation, and supply chain. The combination shows particularly keen eyesight. While many, including some big names in economics, have wanted to blame everything on lax monetary policy, that seems overly simplistic. Long-standing dovish Fed strategy had been an attempt to gin up economic activity. But it was massive systemic supply chain problems experts had warned against for decades that, sparked by the pandemic and national responses to it, which turned into the logistical disasters that choked supply dry. And then came Russia’s invasion of Ukraine, pushing inflation in areas like energy and food even higher and faster.

“As complex economic issues continue to impact capital markets activity, investors are searching for investment bright spots in murky economic conditions,” the report quoted Tina Lichens, Lightbox senior vice president of broker operations as saying. “Market fundamentals still support a broad range of investment activity, but the more immediate question is how long any market downturn will last.”

With only a tenth unconcerned about the potential of a recession—and recognizing that companies expecting a recession might take the preemptive steps that could encourage one to happen—it’s not surprising that the main questions have become not if, but when and for how long.

What may have them most concerned is how quickly the Fed piled on the interest rate hikes once it started. But concern about not letting up too soon, as happened in 1980, forcing an ultimately prolonging of difficult times, could delay a needed lightening of corrective action.

“Arguably, the Fed has been oversteering. That implies the Fed will go through with their telegraphed 75 basis point increase in November unless there are substantive changes in the economic readings.” Marcus & Millichap’s John Chang wrote in a recent analysis.

“A tone of cautious optimism remains for the long-term, given strong capital allocations from global sources and the ability of commercial real estate to outpace alternative investment options,” Lightbox wrote. “The current level of uncertainty, however, is adversely impacting short-term deal flow and pricing, along with the availability of capital. This is a marked shift in sentiment and one that is leading many industry practitioners to recast projections for the next 12 to 18 months.”