Sentiment Index: There is Uncertainty Where Asset Prices Will Land

The market overall remains in a period of price discovery, according to the Q1 2023 Real Estate Roundtable (RER) Sentiment Index, which rose slightly compared to the prior quarter.

With low transaction volume and a limited supply of debt capital, “there is lingering uncertainty as to where asset prices will ultimately land,” according to the report, which surveys executive leaders across all asset classes.

Survey participants overwhelmingly indicated that the availability of debt and equity capital is worse today compared to one year ago (93% and 82%, respectively), according to the report.

However, more than half of the participants expect the capital markets landscape to improve over the next 12 months.

Generally speaking, multifamily and industrial continue to attract interest, hospitality, and student housing are beginning to bounce back and Class B office is struggling, RER said.

Many Groups Restructuring Deals

The Index confirmed what most have been reporting in recent months that those with capital are eager to deploy it, but the refinancing environment has been persistently challenging “not only in terms of the banks’ willingness to lend but with absolute interest rates being higher, which in turn hurts internal rates of return,” according to the report.

Additionally, the supply chain is still dysfunctional and construction costs and borrowing costs have both risen, “leading many groups to restructure their deals,” RER said.

“The current conditions are a shock to our system. As firms wait on the Federal Reserve, there’s no clarity on pricing and everyone is wondering if it’s going to be a hard landing or a soft landing. Most people are optimistic that this will not be a long recession.”

Regarding ESG, firms said they are having to “thread the needle between common sense and business sense.”

Multifamily Values Down 20% to 25%

Among the key commentary from survey participants, whose thoughts were published anonymously:

Long term, multifamily will be fine as it continues to perform well, especially relative to housing prices. However, values are down 20% to 25% from their peak pricing and rent increases are starting to slow down, especially in markets with lots of new products, leading to a choppy 2023.

Student housing took a hit during the pandemic, but it bounced back. During recessions, people go back to school, so there may be an increase in demand.

Office buildings are facing the toughest environment in at least a generation with a ‘perfect storm’ brewing of (i) rising interest rates, (ii) a slowing economy, and (iii) a work-from-home policy that isn’t going away.”

Corporate travel remains lower than in the pre-COVID era and operational costs have increased, curbing the margins for hotels.