CRE Finance Sentiment Shows “Cautious Improvement” in Third Quarter
Over the past year, rising rates, difficult debt, and liquidity issues have all played a part in an increasingly troubled outlook for CRE finance markets. A natural knock-on effect has been a sharp drop-off in sentiment around CRE lending, particularly in the latter half of 2022.
According to the results of the most recent Commercial Real Estate Finance Council (CREFC) Board of Governors (BOG) Sentiment Index, however, sentiment continues to climb in 2023, despite remaining “negative” overall.
The index, which CREFC states serves as “a barometer for the industry,” tracks sentiment among a wide swathe of finance professionals including securitized lenders, loan and bond investors, debt and private equity funds, and servicers.
In the Q3 report, the BOG Index rose to 82.7 (from 78.5 in Q2), an increase that CREFC marks as: “a cautious uptick in sentiment,” adding “Incremental improvement was observed in the outlook for CRE fundamentals, liquidity, and the CMBS [Commercial Mortgage-Backed Securities] capital markets.”
This builds on a slow but ongoing sentiment boost that we’ve seen since the start of 2023 when the index began the long process of reversal from 2022’s lows.
Survey respondents were also asked to weigh in concerning specific aspects of the CRE market – such as transaction activity and the outlook for different CRE sectors. Some key highlights from those responses include that:
- 33% of respondents expected an increase in investor demand for CRE assets (up from 25% in Q2),
- Only 64% expected CRE fundamentals like occupancy, rent, and NOI to worsen (compared to around 80% in each of the four preceding quarters), and
- 53% expected that borrower demand for financing would increase (unchanged from Q2)
Meanwhile, on a sector-by-sector basis, most respondents indicated that they thought office properties would “remain challenged,” despite also anticipating a “stronger return-to-office trend.”
For multifamily, CREFC notes: “There is increased concern over multifamily, with rising costs, slowing rent growth, and mounting maturities despite a low current delinquency rate.”
BOG Sentiment Index respondents did, however, identify two bright spots in the CRE landscape: Industrial and Life Science properties. Both asset types are “expected to perform well,” furthering the trend we’ve seen for much of the past few years.
While none of the figures from the latest CREFC Sentiment Index paint a “glowing” picture of the outlook, it’s worth noting that sentiment around the challenges facing the CRE industry is improving as we head into the final stretch of the year.
For savvy CRE professionals, navigating those challenges remains a matter of focusing on fundamentals, and staying on top of the latest insights into what to expect from the market in 2024 and beyond.