CRE Sentiment Heads to the Recessionary Zone

June 27, 2022 | Erik Sherman | GlobeSt.com

When it comes to industry sentiment, uncertainty is taking its toll as confidence in real estate conditions has plunged. Or maybe it’s the growing certainty that something bad is about to happen.

CRE strategic advisory RCLCO released a new report saying that sentiment of real estate professionals has slipped nearly down to the range the firm associates with market distress and recession.

The RCLCO Current Real Estate Market Sentiment Index, which is a 100-point scale, slipped from the 82.1 at the end of 2021 to the current 35.1 in May. The firm says that a value of 30 is generally a sign of bad economic times for CRE markets.

This hasn’t been the only sign of falling confidence. The CRE Finance Council (CREFC) found that overall sentiment among its board of governors took a nosedive for the first quarter of 2022. In early May, broker sentiment actually fell in the industrial market.

In the RCLCO analysis, respondents expect continued market deterioration over the next 12 months and 92% of all respondents think there will be a recession within the next two years. And 54% expect a recession within one year. Roughly two-thirds say that real estate conditions will get “moderately” or “significantly” worse.

“For-sale housing remained in the expansionary phase of the cycle, but an increasing number of respondents indicated that this sector was reaching the peak or had already crossed over into the early downturn phase,” the report said. “Rental housing was still firmly in expansion mode, but more respondents believed that this sector had moved from the early to late stable phase of the cycle indicating that the apartment sector may be approaching a peak.”

There was far less clarity in other areas of real estate. “Many felt that hospitality and industrial were in in the stable phases of the cycle, while there was wide variation in retail and office with respondents all over the map from early downturn to early recovery, early stable, and even late stable, perhaps reflecting the high level of uncertainty in the overall economy,” the firm wrote.

But most expect interest and cap rates to rise, the latter of which would seem likely to correlate with a fall in prices. And they also look toward ongoing increased levels of inflation at a 2 to 1 split. Close to 70% expect capital flows to real estate to either remain the same or decrease moderately.