CRE Sentiment Slumped Again In Q3 Amid Broader Market Concerns

The latest quarterly sentiment index from industry association CRE Finance Council reveals reveals concerns across various fronts of the overall economy and commercial real estate markets.

The Index is derived from the CREFC Board’s responses to nine core questions on the state of the CRE finance market and the latest data shows that in Q3 overall sentiment continued to slump, dropping 13% quarter-over-quarter to hit 61.4. That marks the fifth consecutive decline following 12% drop in overall sentiment in Q2. Sentiment for CRE fundamentals also moved significantly, with 83% of the Board expecting fundamentals to worsen, a 49 point jump from Q2.

Trends in CMBS and CRE CLO demand/spreads and their impact on CRE finance-related businesses also shifted negatively. In 2Q 2022, 49% believed there would be a negative impact, with 40% remaining neutral. In the current survey, 75% held a negative outlook, with only 21% remaining neutral. And 89% of Board members held an unfavorable outlook for CRE finance businesses, up from 59% in Q2.

The survey also included open-ended questions for the CREFC Board, including one focusing on a recent Trepp article stating that some 3,000 loans totaling $53 billion with a DSCR of 1.25x or lower are scheduled to mature over the next two years.

“Most responses indicated that upcoming loan maturities would drive special servicing rates and losses higher,” the CREFC noted in a statement. “However, some on the Board held that losses would be muted, given the amount of capital on the sidelines, disciplined underwriting, and value creation over the last 10 years. Others held that there would be pockets of distress but that losses would be far lower than those during the Global Financial Crisis.”

In addition, 92% of the Board said the US will enter a recession this year or next.

“This most recent survey accurately captures the concerns of the industry at large at this time. The Fed continues to raise rates, inflation persists, and the potential of an economic downturn remains top of mind,” said CREFC Executive Director Lisa Pendergast in prepared remarks. “The shape of the commercial real estate debt market changed very quickly in the third quarter, and the surveyed responses reflect that swift shift. We remain optimistic, however, that despite the increased likelihood of a recession, we are in a much better position and stronger place than we were as an industry in 2008. We will continue to be a resource and a voice for our industry and members in these uncertain times.”