CRE Investors Are Feeling Less Confident Than At Any Point Since April 2020

The commercial real estate finance industry has a gloomy outlook at the start of the year as investors and lenders mull the impacts of global instability, soaring inflation and the rising interest rate environment.

The Commercial Real Estate Finance Council Board of Governors' Sentiment Index for the first quarter of 2022 — which surveys CREFC's 60 board members, who are executives across the commercial real estate finance industry — recorded an overall sentiment decline of 23% from the end of 2021. 

This decrease was the largest decline in the index since the onset of the pandemic at the end of Q1 2020, when CREFC governors' confidence dropped by 31%.

"This most recent survey perfectly captures the industry's mood at this time. There are several once-in-a-lifetime macro risks whose outcome remains uncertain," CREFC Board of Governors Chairman Eric Thompson, a managing director at Kroll Bond Rating Agency, said in a release. "However, real estate assets continue to perform, and while lenders and investors have become more selective, transactions continue to occur, and year-to-date lending volumes are still well ahead of 2021.”

The group has been gathering the index, which is formulated from the board members' responses to 10 questions relating to the commercial real estate finance market, since the last quarter of 2017.

The responses to questions relating to the U.S. economy were largely negative this quarter, compared to a trend toward neutrality. While in the last quarter of 2021, 65% of the board expected the economy to improve or stay on par, only 25% of respondents felt that way in the first quarter.

In fact, 75% of respondents indicated they felt the economy would worsen. When it came to borrower demand for commercial real estate and multifamily debt, 35% of respondents thought there would be less demand. That is compared to the last quarter of 2021, when 59% of the board expected there to be more borrower demand and almost no one expected demand to temper.

Although the board members didn't predict any liquidity issues, just 19% have an overall positive outlook while, with 52% saying the industry will stay the course.

“While volumes may come under pressure, we expect robust liquidity for real estate assets to partially offset downward pressure on values and fundamentals,” Thompson said.

Conflict in Ukraine, an aggressive Federal Reserve and record inflation levels have created a gloomy outlook for the U.S. economy in 2022. The International Monetary Fund released its latest outlook Tuesday, cutting expectations for global economic growth and describing the war as similar to an “earthquake” with international economic effects.