Real estate investor sentiment has dropped to the low point it hit at the start of the pandemic, when measures to stop the spread of COVID-19 led to a national shutdown of properties and group gatherings.
The current state of the market, with borrowing rates higher than property returns and widespread fear of a recession, has prompted the sharp drop in confidence, according to the Real Estate Roundtable’s latest sentiment index, a measure of senior executives’ confidence in and expectations of the commercial real estate market.
The index dropped to an overall score of 39, five points lower than the previous quarter. Not since the first quarter of 2021 has the index been this low.
Real Estate Roundtable, a nonprofit public policy organization based in Washington, D.C., cited multiple reasons for the declining confidence reflected in its latest survey.
“Industry executives report that asset valuation difficulties, coupled with the tightened availability and cost of capital, have caused a slowdown in commercial real estate investment and overall transactions,” Roundtable President and CEO Jeffrey DeBoer said in a statement. “This situation, magnified by steep inflation and interest rate hikes, is leading to investor hesitancy.”
In addition, while some businesses are instituting greater return-to-the-workplace policies, many are not, DeBoer added.
Real Estate Roundtable has been urging policymakers and business leaders to push for the safe return of workers to their shared, physical workspaces.
“A back-to-the-workplace movement would increase overall economic productivity and competitiveness, help preserve urban small businesses, and lower the threat to the property tax base of municipalities throughout the nation,” DeBoer said. “Ultimately, greater clarity on businesses’ future post-pandemic workspace demands is needed to provide a more reliable window into asset valuations, particularly in the office sector.”
About 78% of survey respondents said they believe general market conditions today are “somewhat worse or much worse” versus one year ago, while 70% anticipate current conditions will continue or get worse one year from now.
The real estate industry leaders noted a reduced number of transactions across all property types, including multifamily and industrial. However, some specialty assets such as logistics and biomanufacturing are seen as rising stars emerging from this period of economic uncertainty, according to the survey results.
Transaction volume has fallen off enough that respondents found it difficult to comment on pricing. However, 92% said they believe that real estate asset values compared to one year ago are “somewhat lower or much lower” as investors cautiously eye the economy.
While current capital availability is sparse, the respondents felt somewhat optimistic about future availability. About 48% expect debt financing will be somewhat better this time next year.