A Subdued Outlook Prevails – July 29, 2024
Notwithstanding the stronger-than-expected GDP reading for the second quarter, the commercial real estate industry outlook has remained subdued, both here and abroad. This was evident in the most recent CREFC Board of Governors Sentiment Index and is apparent in the newly issued Royal Institution of Chartered Surveyors (RICS) Global Commercial Property Monitor Q2 2024.
The headline Commercial Property Sentiment Index (CPSI), conveying the overall sentiment of respondents towards the market in general, returned a marginally more negative figure among U.S. respondents for Q2, at -8 compared to -7 in Q1. However, RICS points out that a one-point drop suggests that “attitudes towards the market are only declining slightly. Occupier demand is still increasing but demand has slowed since Q1.”
The availability and cost of borrowing worsened in the market during Q2 as far as U.S. respondents were concerned. Their counterparts in Canada were a little more upbeat, with a higher percentage saying that credit conditions had improved slightly.
The Canadian outlook at present is more in line with the global picture. A net 15% of respondents globally said credit conditions improved in Q2; that figure drops to net zero in the U.S. In Q1, net 10% saw an improvement in U.S. credit conditions. “Set against this, the Canada results show a net balance of +23% signaling a more accommodating credit environment, compared with -2% in the early part of the year,” RICS reported.
Even so, buyer demand increased in the industrial and retail segments of the U.S. market during Q2, while office buyer demand continues to decline, according to RICS. Future price reductions for prime offices, secondary retail and hotels are likely across the U.S., according to projections. Conversely, respondents anticipate solid price growth for data centers, senior care facilities and student housing.
Respondents noted that domestic political and geopolitical uncertainty is negatively impacting the market. Furthermore, heightened interest rates continue to subdue activity—and it’s unclear when the U.S. market will start to see relief on that count, even as a few other central banks have begun to loosen their monetary policies. Many investors are taking a “wait and see” approach, reflected in the similarity of Q1 and Q2 results.
“The result of the coming Presidential election in November should provide further clarity for investors going forward,” according to RICS. It should be noted that the survey was conducted prior to the incumbent President dropping out of the race earlier this month, although the policies of the incoming chief executive are known quantities regardless of who ends up being elected.
“Despite some strong economic indicators and positive signs in industrial and retail, uncertainty persists around interest rates and office vacancies,” said Michael Zuriff, senior public affairs officer at RICS. “The unpredictable presidential election season isn’t helping, and I’d anticipate continued caution through November.”
Domestically, the outlook expressed by comments excerpted in the survey varied by region. “Overall, market conditions remain good,” said a respondent in Nashville. “Tenant demand remains strong, and capital values continue to trend upwards despite the strong economic headwinds created by high interest rates. Our market always has, and will always continue, to be land constrained, which means we don’t see overbuilding, so rents and values generally trend upward given the supply challenges.”
A New York City respondent was a little more guarded. “I think things will slowly improve, but there is still a great wall of debt coming due next year, which could negatively impact everything even worse.”