Q1 2023 Sentiment Report: The State of CRE & What’s to Come

The Real Estate Round Table recently released its 2023 Q1 Sentiment Survey, a comprehensive measure of industry experts’ confidence and expectations regarding the commercial real estate environment. As we’ve observed throughout the first quarter of 2023, the real estate market has been uncertain and incredibly volatile due to the historic increases in short-term interest rates and soaring inflation.

Although experts acknowledge the lack of clarity on pricing and the uncertainty about current market conditions due to inflation, rising interest rates, and supply chain disruptions, there is an overall optimism that this recession will not last long and that inflation is at its peak in most markets. Here are some key findings and highlights from the Real Estate Roundtable Sentiment Index for first quarter, 2023.

According to the Real Estate Roundtable’s Topline Findings, the Q1 2023 Sentiment Index registered an overall score of 44, an increase of five points from the previous quarter. The Current Index registered 31, a two-point increase from Q4 2022, and the Future Index posted a score of 58 points, an increase of ten points from the previous quarter. The graph is a helpful visual when considering the current state of commercial real estate compared to sentiments from past years.

General Conditions

As you can see from the graph, the future looks hopeful with 50% of experts predicting much better or somewhat better conditions a year from now, compared to 11% from last year. The take on specific property sectors, however, varies.

As stated in the sentiment index, the largest pension and insurance investors are drawn to multifamily, industrial and niche products over office or retail. Multifamily values are down 20% to 25% from peak pricing and rent jumps, but the sector will be fine long term, particularly relative to housing prices. Industrial continues to attract capital given the ongoing supply chain issues and high demand for W&D and logistics space near ports and rail lines, especially on the East Coast.

The demand for office space and desire to work in an office environment is much more prevalent outside of the US than within it. According to the Wall Street Journal, office occupancy is at 70% to 90% of pre-pandemic levels in Europe and the Middle East, compared to the US’ 40-60%. The combination of rising interest rates, a slowing economy, and a desire to work from home is creating the toughest environment in over 10 years for office buildings. In fact, office sales sank 28% in the US. High amenity buildings can draw workers back to the office, but Class B office is struggling.

Meanwhile, RER found that retail driven by the property’s specific submarket. “Local, small retail is holding up, but big box is suffering unless it’s a neighborhood grocery store,” according to the organization. Investors are wary about putting capital into retail since equity is very asset specific.

The RER sentiment index has positive news for hospitality—experiential travel has a sustained level of demand, particularly on Mondays and Fridays as people make time for long weekends. Corporate travel remains lower than in pre-COVID times and operational costs have increased, curbing the margins for hotels.

The Q1 2022 RER Sentiment Index demonstrates a mixed performance across all asset classes. As we explored in the report, multifamily and industrial have maintained steady growth, given increased demand for housing and supply chain related needs. However, things don’t look so good in the office sector, as record-high vacancy fuels concerns and desire to work from home continues. Additionally, experiential travel has sustained a solid demand, though corporate travel remains lower than in pre-pandemic times. In part 2, we will outline the key findings and highlights on real estate asset values and capital markets.