‘Modest’ CRE Market Sentiment Slip

Commercial real estate executives’ market sentiment has decreased “modestly” since year-end 2017, reported RCLCO, Bethesda, Md.

“Real estate is expected to experience moderately declining market conditions over the next 12 months,” said RCLCO Managing Director Len Bogorad. But he noted the firm’s Real Estate Market Sentiment Index is expected to remain above 50 on a 100-point scale, indicating fairly healthy market conditions.

More than two-thirds of respondents expect the next real estate downturn to be in 2020 or later and one-quarter said they expect the next downturn to be in 2021 or later–which would put the next cyclical peak significantly later than in previous surveys–the firm’s Real Estate Market Sentiment Index report found.

RCLCO predicted “generally positive, though moderating” commercial real estate operating and investment performance through the rest of 2018. While most product types showed little movement from the last survey six months ago and remained in the stable phase of the real estate cycle, several product types moved into the late stable phase. “For-sale residential, office and resort/second home product types all moved definitively into the late stable phase, with seniors and age-restricted land uses continuing to creep closer to this phase,” the report said. “Hospitality, land and industrial [property types] exhibited almost no cycle movement. Notably, both retail and multifamily moved ‘backwards,’ albeit slightly, in the cycle during the midyear 2018 survey, reinforcing the notion that there has been little change since the last survey.”

Survey respondents predicted all land uses will be firmly in the “late stable” phase within the next 12 months, RCLCO said. “Retail and multifamily are expected to be the farthest along, sitting at the top of the cycle and approaching the early downturn phase. Following closely behind retail and multifamily, land, hospitality, for-sale residential, office and resort/second home are also expected to move farther along in the late stable stage.”

Sentiments about current national real estate conditions remain relatively high; just slightly below where they stood six months ago, RCLCO said. Just over half of survey respondents said national real estate market conditions are moderately or significantly better today than 12 months ago. This represents a five percentage point drop from year-end 2017 survey and a one percentage point drop from a year ago. The share of respondents reporting worse market conditions today than one year ago remains a “small but increasing” minority of 14 percent, up four percentage points compared to six months ago.

The report said both economists and survey respondents tend to identify 2020 as when the next recession will start, in part because they cannot identify any trend or event that would disrupt current positive trends before then. “While the yield curve is not completely flat, it would be prudent to monitor as it has been one of the most reliable predictors of recessions,” RCLCO said. Historically, recessions tend to begin six months to two years after the yield curve flattens. “If the yield curve becomes flat soon, this would be consistent with a recession beginning in 2019 or 2020. We are operating under this perspective as well, though as the expansionary phase of the cycle continues, it is advisable for all of us in the real estate industry to prepare contingency plans, revisit strategies for the late stable and early downturn phases of the cycle and be prepared to react quickly to potential alternative outcomes.”