Taking a Closer Look – August 21, 2023

We have reported the topline results of The Real Estate Roundtable’s latest quarterly Sentiment Index, which reflects the attitude of industry heavy hitters and which registered a five-point increase overall from the previous quarter.

Let’s start with the two indices that comprise the overall Sentiment Index. Since the overall index, the Current Economic Sentiment Index and the Future Economic Sentiment Index all are measured on a scale of 1 to 100, with 50 as the break-even point, it’s worth pointing out that the overall index for the third quarter is still in negative territory. 

The Current Index registered 33 in the latest survey, a six-point increase from Q2 2023, and the Future Index posted a score of 59 points, an increase of four points from the previous quarter. Although both indices increased, the Current Index is still well below break-even, while the Future Index outlook is in positive territory, but barely. That said, it has improved from a year ago. 

Moreover, a majority of survey respondents (64%) said that current market conditions are “somewhat worse” or “much worse” compared to a year ago. And the future outlook, examined more closely, is pretty tepid: 75% of survey respondents think conditions will be “somewhat better” or “about the same” 12 months from now. 

“Disparities between asset classes persist in these challenging market conditions,” according to The Roundtable. “Hotel and retail markets are largely performing well. Niche asset classes continue to generate interest. On the other hand, office is performing poorly, and rental growth in multifamily and industrial are starting to abate.” 

The survey found that perceptions of declining asset values continue to dominate. Ninety-five percent of participants reported that asset values are lower as compared to last year. Although Class A properties across all asset classes are trading at competitive prices, managers are still in a “wait and see” mindset for other assets. That translates into lower transaction volumes and an inability to complete accurate valuations. 

The availability of capital, both debt and equity, continues to be a pressing topic, The Roundtable says. Eighty-five percent and 69% of survey participants, respectively, believe that today’s debt and equity conditions are more difficult than a year ago. The long-term outlook is more optimistic: although managers face a difficult capital-raising environment, only 24% and 9% of participants believe debt and equity availability, respectively, will be worse a year from now as the industry works to creatively solve financing issues. 

“Despite doing well at the asset level, interest rates are causing balance sheet stress even for non-office sectors,” said one respondent. “This is particularly true in situations where loans are maturing and an owner needs to refinance, or for those with floating rate loans.”