Commercial real estate returns fell into negative territory in fourth-quarter 2022 and the outlook for first-quarter 2023 was just as gloomy. These are among the findings in the most recent ValTrends quarterly report released this past March by SitusAMC Insights, a leading solutions provider for the real estate finance industry.
“The more volatility there is, the more uncertainty there is, the more there is a tendency to do nothing.”
Among other findings from the report, the availability of capital dropped for the fifth consecutive quarter to reach the lowest level since the financial crisis of the late 2000s. Economic uncertainty, rising interest rates, stubborn inflation and bank worries have all combined to reduce the number of commercial transactions, leaving lenders, borrowers and brokers watching and waiting to see what comes next. In March, SitusAMC’s Peter Muoio spoke with Scotsman Guide about the findings of the report and offered his opinions about how commercial real estate can shake its malaise in 2023.
What do you expect for the commercial real estate market for the second quarter of this year and beyond?
There is a rising intensity and volatility that we’ve been seeing in the capital markets recently. Given this sort of situation, the more volatility there is, the more uncertainty there is, the more there is a tendency to do nothing. You are not going to jump in (as an investor or lender) and do something very specific or dramatic when you’re not quite sure what direction the economy, interest rates and prices are going.
So, our expectation going forward in the second quarter will be more of the same in terms of this uncertainty leading people to hold back. That will translate into not a lot of transactions and not a lot of visibility on pricing, and probably not a lot of movement between the first quarter and the second quarter.
In the overview of your survey results, you mentioned that commercial real estate is in a period of price discovery. What will that mean for the markets?
The biggest question everyone is asking right now is, where are the property prices? The problem is there are not a lot of transactions. And of the transactions that are taking place, we are finding something of a barbell-shaped pattern. We are seeing some distressed deals that have to get done and we are seeing some high-quality Class AAA deals that are getting done. But there are not a lot of everyday deals in the middle. So, there is a limited sample of price information and it’s sort of skewed toward either end of the spectrum.
Are you seeing commercial property prices drop?
It’s starting to happen. Data released on private real estate pricing was negative in the fourth quarter of 2022. We don’t have first-quarter data yet, but the information we are getting from our sources is that the downturn that started in valuations in the fourth quarter is continuing into the first quarter.
Your survey says that coming into 2023, the industrial and multifamily sectors remain strong. What sectors are proving the weakest?
The office sector comes to mind right away because it has the worst space-market conditions of any sector. On top of that, it has the most uncertainty. There are record vacancy rates on a national level, and there are still questions about the long-term implications of remote and hybrid work and how that will translate into space demands for companies. On top of that, we’ve seen a very significant wave of layoffs in the tech sector, which is a very office-intense part of the economy.
Is the recent banking crisis another factor in the equation concerning office-space issues?
I think the banking crisis is playing into the hesitancy across property segments. Signature Bank had a very significant commercial real estate portfolio and a lot of those properties were around the New York City area. However, regional banks hold about two-thirds of the commercial real estate bank loans across the country. I think the likelihood is that those sorts of banks will be more cautious moving forward.
What is key to getting the market to settle down and to begin moving again?
Ending the uncertainty is the key. Uncertainty is the enemy of decisionmaking, and we have uncertainty about interest rates, the course of the economy, whether we will have a recession and even geopolitical issues. All those things are the enemy of decisionmaking. It will really take some calming of the waters across various metrics. I think we are all waiting to see what happens next, and what happens next is dependent on all those other factors we discussed. So, some calm times would be great for everyone. ●
