Commercial Real Estate Market Sentiment Declines Slightly

Commercial real estate executives’ market sentiment slipped from six months ago but remains strong, reported RCLCO, Bethesda, Md.

The twice-annual RCLCO Real Estate Market Sentiment Index plunged to a “dismal” 9.2 on a 100-point scale at mid-year 2020 in the wake of pandemic-related shutdowns. The index improved to 89.1 in June 2021 before slipping to 82.1 at year-end.

“The year-end result shows a more tempered sentiment as new variants have emerged in the second half of the year that are more transmittable and vaccine-resistant and as concern about inflation increases,” RCLCO said.

Survey respondents said they expect real estate market conditions will continue this gradual decline, forecasting the index could drop to 69.0 over the next 12 months. “This would bring sentiment in line with average levels over the past 10 years,” RCLCO said.

Just over half the survey respondents–57 percent–said they believe commercial real estate conditions will get moderately or significantly better in the next 12 months.

Most respondents noted they believe COVID-19 will reduce long-term office demand; 41 percent expect a 10-20 percent drop while just over a third expect a smaller 10 percent or less reduction.

“The apartment market boom will continue for at least another year,” the report said. “Nearly half of the respondents indicated apartment rent growth would remain somewhat above historical levels in 2022.”

Respondents indicated many product types have moved from the Early Recovery to the Early Stable phase over the past six months. “Retail remains at the bottom of the cycle due to ongoing disruption from COVID-19, though both office and hospitality have reached early expansion,” RCLCO said. “Encouragingly, retail is expected to return to Early Recovery within the next 12 months.”

Looking ahead, most respondents said they expect interest rates will rise, inflation will increase and capital flows to real estate will increase. RCLCO found less consensus about likely cap rate performance over the next 12 months, but slightly more predicted cap rates will rise than six months ago.