Uncertainty Colors CREFC's Sentiment Index

Uncertainty about the state of the economy and the real estate sector has helped push down the CRE finance industry’s outlook for the sector in the coming quarter, as revealed by a recent survey of the views of senior executives. An election year doesn’t help.

Their views, reported in the 2Q 2024 Sentiment Index Survey of the Board of Governors of the CRE Finance Council, showed a 3% drop in the index from the previous quarter from 105.4 to 102.4. “This change reflects growing caution in the economic outlook and the ongoing impacts of higher interest rates,” the report commented.

It identified growing pessimism about economic performance, with 35% of respondents expecting a weaker outlook, just 11% offered more of a positive view, and 54% were neutral.

Uncertainty about the impact of legislative and regulatory actions led 67% to a neutral outlook on the impact of federal legislative and regulatory actions. A clear majority, 61%, however, thought a Trump administration would be better for CRE finance. The survey was conducted before President Biden’s resignation, with just 11% favoring a successful re-election, and 22% thinking the outcome either way would be the same.

The election could also affect the market. “The presidential race will keep the rest of 2024 stagnant,” one respondent commented. Another warned of trouble ahead. “Expect regional banks to start cracking and the next President, whomever it is, to inherit a regional banking crisis,” they commented.

Out of 10 respondents, four thought mortgage rates and cap rates would have a positive effect on CRE finance-related business. Just over one in three predicted a negative effect and one in four was neutral.

Respondents generally expected CRE fundamentals like occupancy, rents, and net operating income to remain stable over the next quarter, with the possibility of a slight improvement. More than half the respondents (54%) foresaw steady transaction activity ahead, similar to the first quarter of 2024, with demand for financing remaining strong for the next 12 months.

There was uncertainty about the liquidity of CRE debt capital markets in the year ahead. Some 46% thought liquidity would improve, 37% thought it would remain the same, and 17% expected it to get worse. As for trends in commercial mortgage-backed securities and CRE collateralized loan obligations, 84% of respondents expected them either to hold steady or improve the performance of CRE-finance-related businesses in the next 12 months. Despite the improvement, one respondent warned of increased challenges in completing transactions.

Uncertainty was also exposed by the significant increase from 49% to 61% in the number of respondents who held neutral views on CRE finance in the year ahead, and a 1% increase to 17% in the number with negative views.

Noting the sharp increase in CMBS issuance driven by SASB (single asset, single borrower) transactions, the survey analyzed expectations for the second half of 2024. Some 48% expected it to remain stable, 37% thought it would continue to grow, and 9% predicted a decline as investors become more risk-averse.

If interest rates remain high in the second half, 50% of the respondents said there would be increased reliance on CMBS as traditional bank funding dried up, and 35% anticipated greater use of alternative financing like private equity and debt funds. Almost one in 10 thought loan terms would become more stringent, with lower proceeds and reduced loan availability.

The lack of a consensus on the state of CRE finance was also reflected in the various outlooks for the year ahead. One in six anticipated moderate growth, 33% see stagnation due to economic uncertainty and caution about lending, while 7% expect a decline.

Others considered that valuations would remain depressed, placing maturing loans at risk. Some saw acquisition financing for multifamily picking up, while others noted that multifamily issues were continuing with distress resulting from loan resetting from low rates. “Climate risk and insurance costs and availability will become more of an issue in the next 12 months,” one respondent warned.

“The 2Q 2024 survey results reflect an industry forging its way through significant uncertainty. As the industry navigates these challenging waters, its resilience and ability to innovate will be key to capitalizing on emerging opportunities while mitigating potential risks,” commented Lisa Pendergast, Executive Director of CREFC.