The Real Estate Roundtable’s Q1 2021 Economic Sentiment Survey revealed optimism among commercial real estate industry leaders about current and future market conditions, particularly for the industrial and multifamily sectors. The view that conditions are improving is based on a general supply and demand balance, functioning capital markets and low leverage, according to Real Estate Roundtable president and CEO Jeffrey D. DeBoer. Accelerated vaccine distribution is also contributing to the positive outlook.
The Roundtable’s Q1 2021 Sentiment Index, which measures participants’ expectations for the CRE market, was 59 on a scale of 1 to 100, a 15-point increase from the fourth quarter of 2020. Any score over 50 is viewed as positive. The Future Conditions Index, which looks ahead rather than at current market conditions, was 74, up 13 points from the last quarter. The last time the Futures Condition registered this high was more than a decade ago in Q3 2010.
Overall, 78% of respondents to the survey said they anticipate general market conditions will be better one year from now, including 52% who said things will be somewhat better and 26% who said market conditions will be much better.
Varied outlooks by property sector
The sectors with the most resilience during the pandemic include industrial and multifamily properties, both of which are positioned for success as the pandemic’s impact fades. On the opposite end of the spectrum, the retail and hospitality sectors continue to be challenged by health concerns, public health measures and government restrictions on travel and business transactions.
“It’s really a tale of two worlds. The “haves” are industrial and multifamily and the “have nots” are retail, hotel and office to some extent,” according to the report.
Even within the multifamily sector, though, challenges face urban residential properties while suburban apartments remain strong.
Limited transaction volume
The limited number of transactions in 2020 and during the first quarter of 2021 have made it more difficult to analyze valuation trends. Among the few trades that did occur, industrial properties saw their values increase. Multifamily properties traded at a slight discount compared to their values before the pandemic.
One respondent to the survey said, “Over the course of 2020 residential asset values probably declined about 5% but the bigger impact in 2020 was fewer trades as capital wanted to sit on the sidelines. We are seeing bids 8-to-10% below pre-COVID levels.”
Most respondents to the survey are optimistic that overall asset values will be higher in the first quarter of 2022, with 57% believing values will be somewhat higher and 8% anticipating much higher values.
Capital flow property-dependent
The varied performance and fundamentals for different property sectors impacted the availability of capital. Most respondents to the Roundtable survey said that capital markets were accessible in the first quarter of 2021 for high quality assets in the industrial and multifamily sectors. According to the report, “However, out-of-favor property types and strategies with leasing and/or development exposure are finding it more difficult to secure institutional equity and financing.”
While not quite as optimistic about the availability of capital one year from now as they are about general market conditions, most respondents think capital flow will be somewhat better or much better in the first quarter of 2022.
Current capital flow conditions depend on the property type.
According to one respondent, “For industrial and multifamily, debt is consistently available for good assets - everything is pricing within 3% right now. For office, debt availability is based on role/sponsorship and view of the micro market. For retail and hospitality, debt is more opportunistic.”
Another respondent says plenty of pent-up capital is ready to be deployed, but that in the current market risk avoidance is of prime importance. The capital being invested now tends to be for more stabilized projects, although one respondent said that discussions about construction projects are beginning to take place.
One respondent to the survey said, “Equity investors are really interested in multifamily. They took a pause in 2020 for a few reasons, but traditional equity investors have come back this year and are underwriting as they always have.”
Generally, market conditions are anticipated to improve over the next year, particularly for certain property types and geographical regions.