Commercial real estate professionals are expecting the office sector to have the most challenging close to 2022.
According to Trepp’s 2022 CRE Sentiment Survey, 70% of commercial real estate professionals predict the office sector will continue to struggle, as employers continue allowing employees to work remotely or enforcing a hybrid work schedule, lessening the need for office space. Only 9.4% of professionals predicted lodging would struggle throughout the year, followed by multifamily, said 6%. On the other hand, nearly 60% of respondents think multifamily occupancy will increase through 2022, while about 40% expect lodging occupancy to increase. Additionally, more than 70% of respondents expect multifamily rents to rise throughout the year.
“As of today, the industrial space remains very robust,” said Society of Industrial and Office Realtors® President of the Philadelphia chapter, Colin Flynn. “We continue to see strong tenant demand with very little inventory being available. Rents are still growing, annual increases of 3.5-4% are becoming more common and landlords are offering less money for tenant improvements.”
Interest rates are also expected to impact commercial real estate business, with 63.1% of professionals predicting a negative impact by the end of 2022. Inflation is the top concern for commercial real estate, said 70.8% of respondents, while 59.7% said interest rates and 36% said supply chain issues. Nearly 29% said labor retention is a concern and 22.3% said regulation is another potential issue. More than half of respondents (54.9%) predict economic conditions will have a negative impact on business by the end of the year.
“There is some caution looking ahead,” added Flynn. “Amazon announced they will be subleasing a fair amount of space and there are a lot of new development projects in the pipeline. Depending on when they can be delivered, it will be interesting to see which ones get built. As far as sales, we are seeing a lot of investors and developers that had to change their underwriting. For a number of reasons, that has led to a price correction on many transactions and sometimes the sellers aren’t willing to accept that.”
More than 80% of respondents said they believe that CRE/CMBS delinquencies will worsen over the next six months. A quarter of respondents expect a recession will happen by the end of the year and nearly 60% think a recession will happen in 2023.
“While transaction volume remains high across the board, relatively speaking, external pressures like rising interest rates, inflation and overall consumer sentiment are starting to have a noticeable impact on the industry,” said Chichi Ahia, secretary for the Philadelphia chapter of the Society of Industrial and Office Realtors®. “Most of the impact centers around adjustments to the risk profile of transactions. According to Costar reporting, transaction and volume in the U.S. dropped in each month of the second quarter following increases in the Federal Reserve rate. In addition, between the rising rates, inflation and fears of an economic slowdown, most buyers and lenders view certain transactions as more risky as they would have a year ago. Because of this, we’re seeing more conservative underwriting, less risk tolerance and rising CAP rates on certain investment deals.”
However, the majority of respondents said their business has either grown or remained unchanged, with only about 28% replying their business is down from 2021. Less than 15% report downsizing or plans of downsizing their office.