Commercial real estate survey: Downturn will be bad but not terrible

The commercial real estate industry, based on the results of a large recent survey, is gearing up for some rough patches — but it could be worse. 

The report, the 2022 Trepp CRE Sentiment survey, found that “for several parts of the economy, the most severe outcome would be avoided.” New York City-based Trepp, an industry data and analytics firms, polled its podcast listeners, clients and blog readers, mostly commercial real estate brokers and property owners and industry executives, from July 13 to Aug. 1.

Avoiding severity, of course, isn’t exactly an A-OK message. The industry is forecasting several potholes in the next year. For one, in general, when asked about the condition of the commercial real estate markets, “most respondents indicated headwinds were outpacing tailwinds.”

The report also found that more than half the respondents believe economic conditions and higher interest rates will impact their businesses negatively. And, notably, by a ratio of more than 10 to 1, respondents predict delinquencies in commercial real estate and commercial mortgage-backed securities will rise over the next six months. That would be a reversal of the overall trend of a declining commercial mortgage-backed securities delinquency rate for 23 of the past 25 months, the report shows. “Not surprisingly,” the report states, “inflation, higher interest rates and supply chain constraints were the biggest macro concerns in the survey.”

Other findings of the survey include:

• On U.S stock markets, some sort-of good news: Almost two-thirds of respondents don’t believe the S&P 500 will fall below 3200 — a level that represents the most bearish threshold for some analysts. The S&P was $4,280.15 through Aug. 15.
• By a three to two margin, survey respondents predict the Fed will not pause rate hikes before the end of 2022. 
• More than half the respondents say commercial real estate fundamentals will be somewhat worse over the next six months, while only 6% say conditions will be “significantly worse.”
• About three-quarters of respondents believe net effective rents will decline, including almost 25% who believe the decline will be severe. Along those lines, office, at 70%, was the clear choice for the property type that will see the biggest uptick in distress. 
• Nearly six in 10, 58%, of respondents predict multifamily will have the most transaction activity within the next six months.