Deloitte CRE Executive Survey Finds 'Recovery Has Paused,' Citing Capital Concerns

The rush of optimism that commercial real estate executives felt last year has faded slightly as a series of macroeconomic and capital markets factors have dimmed their outlook.

Deloitte’s annual survey of 850 commercial real estate executives, provided exclusively to Bisnow, found a majority of respondents still have generally positive outlooks for the market, but fewer executives are optimistic than last year.

Macroeconomic shocks' potential impacts on the availability of capital are the new top concern raised by investors this year in the survey, supplanting high interest rates. 

One point of concern executives highlighted, which wasn't on the radar last year, was international trade policies. 

The outlook for revenues, however, is quite positive, with 83% of respondents expecting them to improve by the end of this year, though that was down from 88% last year. Deloitte polled CEOs, chief financial and operating officers, and their direct reports at companies with $250M or more in assets under management.

Roughly 65% of the executives said they expect market conditions like rental rates, leasing activity, vacancies and cost of capital to improve through next year. That was down from 68% in last year’s survey but above the two prior years. 

The report’s CRE outlook sentiment index, measuring overall business and industry expectations, also fell from 68% to 65%. 

“It’s a slight dip from the prior year survey, so I say overall that the recovery has paused but is not canceled,” Deloitte partner Sally Ann Flood, who leads the firm’s real estate team, told Bisnow. 

For the recovery to ramp up during the next year, real estate executives need to see improvements in the capital markets. 

The survey asked what macroeconomic trends could negatively impact their financial performance in the next 12 to 18 months, and the top response was capital availability, which had been the No. 6 response last year. Elevated interest rates and cost of capital were the Nos. 2 and 3 concerns. 

But the capital markets have shown some promising signs that Deloitte’s report identified.

New loan volume in the first quarter was up 90% from the same time last year, and mortgage loan spreads tightened by 183 basis points, according to CBRE.

CMBS originations have more than doubled since last year, according to Trepp, and roughly $585B of dry powder was looking to invest in commercial real estate as of last month, according to JLL. 

“Those sources of capital are a shift from 12 months ago,” Flood said. “There’s much more availability.”

Capital appears to be more plentiful for borrowers seeking new loans than for holders of legacy loans with looming maturities, although the executives' chief concern is that the moment won't last.

More than half of respondents to Deloitte’s survey said they have a property loan maturity in the coming year. Of those respondents, just 21% expected to pay off the loan in full, while 34% hoped to extend or modify the loan, 29% aimed to refinance the loan, and 15% expected to go into foreclosure. 

“There’s really two tales to the debt markets,” Flood said. “You’ve got the legacy loans. … We’re getting to the end of the big maturity stack, but we’re now seeing the other side of this being smarter capital. Newer loans are actually opening up for CRE.”

Many of the legacy loans that have gone into foreclosure and will continue to do so are in the office sector, where cuts to property valuations have left borrowers underwater. But these distressed situations present opportunities for new investors to come in with fresh capital. 

Office Emerges From The Ashes

The office sector has become a growing target for investors over the last year. Deloitte’s survey asked executives which asset classes they believe “will present the greatest opportunity” for real estate investors over the next 12 to 18 months, and office rose up the charts from last year.

Suburban office was the fifth-ranked asset class, up from No. 7 last year, and downtown office jumped from No. 9 to No. 7. 

“That potentially means office is not dead,” Flood said. “It’s going to take awhile to get to the top one or two asset classes of choice for investment. However, you're seeing a lot of cities really come back to work in person.”

In addition to the sector’s fundamentals improving due to the return to work, office has become a more attractive investment opportunity because prices have dropped, in some cases by 50% from their peak. But that discount may not last forever. 

“We’re seeing some of the stats turn with respect to changes in values quarter-over-quarter, so I think we’ve seen the bottom of office valuations,” Flood said. “That reset of values has contributed to office being a positive sector.”

The asset class’s growing momentum is also reflected in the transaction data: JLL reported that office sales hit $25.9B in the first half, up 42% from last year.

The No. 1-ranked property type in Deloitte’s survey was digital economy properties, including data centers. That sector has soared to new heights over the last year as Big Tech companies have poured hundreds of billions of dollars into the facilities to support artificial intelligence. 

Challenges With AI Implementation

AI is also shaping the way CRE does business, and Deloitte’s survey asked executives about their implementation of the technology.

The share of executives who reported experiencing challenges with AI implementation rose from 16% in last year’s survey to 27% this year. Those challenges include technical issues, lack of expertise and resistance to change. 

Far fewer executives this year said they were seeing “incremental operational improvements” or a “transformational impact” from AI compared to last year.

“I think you have to take away that AI has homework,” Flood said. “There are challenges associated with it, and a lot of people were enthusiastic last year about ‘Yes, we’ll invest in AI and reap all the benefits.’” 

The benefits CRE executives have found in AI appear to be more specifically targeted use cases. The top three areas where survey respondents reported positive results with AI integration were tenant relationship management, construction projects and drafting new leases.

“Leasing-specific use cases, we are seeing success there. But as a blanket, AI is not going to fix all your problems,” Flood said. “You have to be targeted in where you’re going to focus on using it to improve your processes and improve your bottom line.”