LightBox Survey: 90% Of CRE Investors Concerned About Recession, But Optimism Remains
It’s been a tumultuous year for U.S. financial markets, as inflation continued to soar and interest rates rose dramatically along with it. This has led many commercial real estate investors to rethink their strategies as they wait to see how the market will react.
LightBox, a leading commercial real estate and technology platform, recently released its fall 2022 Investor Sentiment Report, which surveyed CRE professionals from brokerage firms, investment firms and other segments of the market. The survey showed that 90% of respondents were concerned about the potential for a recession.
Other concerns mentioned included rising interest rates, inflation and continued supply chain disruptions. Despite these challenges, 42% of respondents said they are more optimistic about 2023.
On Oct. 27, LightBox Managing Director of Broker Solutions Michael Griffin moderated a discussion on LinkedIn Live: CRE Voices on the Investor Sentiment Report. The goal was to gain CRE industry experts' insights into the report's findings and the current state and future of the market.
The panelists were Dianne Crocker, principal analyst at LightBox; Jeff Cole, executive vice chairman, capital markets group at Cushman & Wakefield; Sean Fulp, vice chair, head of office capital markets at Colliers; and Laura Nguyen, director of marketing and investor relations at Sentinel Net Lease.
Crocker kicked things off by saying that the CRE industry runs on sentiment, and when reading the survey she saw that Q3 2022 marked a clear turning point in market confidence.
“We're asking the market to adjust to a lot in a very short time frame,” Crocker said. “Think about how much has changed since the New Year's forecasts. Virtually all of those forecasts were obsolete by the time we were going on summer vacation. And, in fact, the survey showed that many of our clients — for example, 47% of environmental due diligence professionals — saw a decline in their third-quarter business activity.”
With numbers like these, it isn’t surprising that caution is beating out optimism when it comes to the market, she said. However, while 50% of respondents were concerned about the CRE balance of 2022, only 36% were concerned about 2023. Crocker said this suggests that we are in a short-term “tap of the brakes” instead of something more long-term.
Griffin pointed out that Fulp has a lot of experience in the office market, which has taken an unprecedented hit in recent years. Fulp said that what is different today is that companies are finally beginning to make decisions about office space — whether that’s to keep what they have or downsize — which is finally giving CRE professionals some clarity into how to forecast market conditions and move forward.
“I think the key word is 'flex,'” Fulp said.
He explained that with hybrid work schedules, companies continue to need flexible space that can easily convert from one use to another throughout the course of a workweek. This will drastically impact how offices are designed and buildings are constructed.
“I think future office buildings, in two or three years, are going to be higher-end, more experiential and [tenant improvement] costs are gonna be substantially more than what they are today,” he said. “And I just think that coming out of this, we're all gonna have a better office experience.”
Nguyen said she believes the office outlook depends on the market but agreed that companies are now looking for tenant improvements ranging from updated lobbies to new green spaces. These improvements can be costly, and investors need to take that into account, among other factors.
“For properties we’re looking to acquire, we're really paying attention to those leases where there may be some one-time termination clauses or anything that gives the tenant the ability to to give back space at a certain time,” Nguyen said. “It's certainly part of our diligence. But we're also seeing that come across in our debt financings where they're looking for those, specifically.”
Moving on to industrial, Griffin said he has seen Cole’s name on some of the biggest industrial deals that have come through LightBox’s RCM platform, and while the industrial market has been white-hot during the pandemic, even industrial investors may be impacted by higher borrowing costs.
Cole agreed that a few things are impacting industrial investment, including inflation, which has hit pricing in the sector. Long-term leases that are already in place that would usually see a standard annual increase of around 2% are now seeing increases of 6%, 7% or even 8%.
“Those investors are basically deferring, in many cases, from the long-term leased assets that have those annual bumps because they're feeling that they're going to be hurt and discounted because of inflation going forward,” Cole said.
He added, however, that industrial markets are fundamentally still performing strongly. Almost every major West Coast industrial market is experiencing historically low vacancy, with strong absorption and rising rental rates.
“Most importantly, many markets still have double-digit, sometimes up to 20%, rent growth over the last 12 months,” Cole said, adding that this should keep industrial assets attractive in the short term.
Shifting back to recession concerns, Crocker said the market is very confounding right now. While there is persistent inflation, unemployment remains low, corporate earnings have yet to take a hit and consumer spending has remained resilient.
“Stats like that don't really suggest that we're in a recession,” she said. “But the reality is, we don't know where the Fed is going to land with rates and it's a safe assumption that they're going to go up more and more until the Fed gets a sense that it's working and that inflation is starting to ease. So the impacts are going to continue.”
She said the best CRE professionals can do in this murky market is prepare — brace themselves for the worst and hope for the better. Crocker, however, remains optimistic.
“In my opinion, one of the best things about our market is that there's always opportunity in commercial real estate and in times of uncertainty like we're in right now, there's a real flight to quality,” she said.
She cited a point made in the LightBox report that market fundamentals are still supporting a range of investment activity and buyers are looking for investment bright spots in hazy conditions.
“In making decisions about investments and today's market, the numbers matter more,” Crocker said. “You've got to look at the assumptions about [net operating income], about rent growth, about occupancy, about operating costs. I think for anybody who is in the business of helping investors and lenders sift through the uncertainty and manage risk, now's really their time to shine.”
For more insights into the CRE market and LightBox report, watch the entire 30-minute discussion on LinkedIn Live here.
This article was produced in collaboration between LightBox and Studio B. Bisnow news staff was not involved in the production of this content.
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