The last three months of 2020 brought a new sense of optimism about the future of commercial real estate finance, as indicated by the CRE Finance Council’s Fourth-Quarter 2020 CREFC Board of Governors’ Sentiment Index.
Participants gave positive responses to nine of the 10 core questions posed for the BOG Sentiment Survey and Index, and they offered generally encouraging reactions to a newly introduced incremental survey on COVID-19’s effect on the real estate industry.
CREFC’s board of governors consists of 56 senior executives representing the diverse facets of the lending and mortgage-related debt investing markets for commercial real estate, including multifamily. In response to a key survey question on the overall outlook for the U.S. economy, a notable 77 percent of the Board indicated an expectation that the economy will perform better over the next 12 months. The response marks a turning point of sorts, as only 53 percent of survey participants anticipated a better economic performance over the upcoming 12-month period in the third quarter of 2020, and a mere 9 percent shared the sentiment in the second quarter of last year.
Board members were also upbeat about the low mortgage environment, capitalization rates and the generally benign CMBS bond spreads, as well as borrowers’ strong demand for debt and equity capital and the healthy availability of capital. However, there was one survey query that gave the board pause: interest rates. Respondents noted their concern over the potential for higher rates over the next 12 months and the effect they could have on businesses in the CRE finance industry. As Lisa Pendergast, executive director of the CRE Finance Council, said in a prepared statement, caution is still top of mind within our lender community, but there is optimism too, as highlighted by the survey’s positive sentiment going above 60 percent this quarter.
Turning the corner
CREFC introduced its incremental survey for the first time in the first quarter of 2020, adding it to the six-year-old BOG Sentiment Survey and Index just as the pandemic first hit the U.S. Like the traditional survey, the newer nine-question supplemental also found a generally optimistic outlook among respondents in the fourth quarter of 2020 compared to the previous two quarters.
Sixty-five percent of participants indicated that they believe commercial real estate will fare better during the pandemic, marking a substantial jump from the 39 percent of participants who shared the sentiment in the third quarter. Looking at CRE on the asset level, 59 percent of board members pointed to retail as the sector that is faring the worst and 72 percent indicated that industrial is faring better than the rest. While most members believe that the industrial and multifamily sectors will go unchanged by the pandemic, 94 percent believe retail will experience changes as a result of the global health crisis, and 91 percent expect a change in the office sector. Fifty-nine percent of respondents foresee post-pandemic changes to the hotel sector.
Finally, although fewer board members believe that the absence of government relief for CRE borrowers will produce greater distress for the industry, more than half still indicate concern, with the figure dropping to 56 percent in the fourth quarter from 69 percent in the third quarter.