The CRE Finance Council (CREFC), the industry association that exclusively represents the $5.1 trillion commercial and multifamily real estate finance industry, announced the results of its Second-Quarter 2022 CREFC Board of Governors’ (BOG) Sentiment Index. The Sentiment Index, initiated in the fourth quarter of 2017, captures the pulse of various industry constituents, including balance sheet and securitized lenders, loan and bond investors, private equity firms, debt funds, servicers, and rating agencies.
CREFC’s quarterly Sentiment Index is derived from the Board’s responses to 10 core questions on the state of the CRE finance market. The Sentiment Index was initiated in the fourth quarter of 2017 and thus tracked markets pre-COVID, during COVID, and today as we continue to recover from the worst of the pandemic’s impact.
2Q 2022 Survey: Concerns Across Various Fronts Continue
Overall sentiment dropped sharply once again, from 80.5 in 1Q 2022 to 70.7 in 2Q 2022, a decline of 12%. This was the third-largest drop in the index following a 31% decline in early 2020, the first survey conducted after the pandemic’s beginning, and a 23% decline in the prior quarter (1Q 2022). The results of this quarter’s survey were not altogether surprising, given surging inflation, rising rates, and wider spreads – in addition to continued geopolitical risk.
Since year-end 2021, the U.S. economy has faced several extraordinary challenges, including:
- Historical Levels of Inflation. Inflation is at the highest level in 40 years, resulting in a Federal Reserve that may be more aggressive in raising rates than initially planned. The challenge for the central bank to achieve a soft landing appears to be increasingly challenging.
- Higher Benchmark Rates and Spreads. The 10-year U.S. Treasury yield began the year at 1.63% and reached 2.32% by the end of 1Q 2022. Since then, it has continued its climb, surpassing 3% when the 2Q 2022 survey was conducted.
- Benchmark conduit CMBS spreads have widened meaningfully over the past year. 10-year AAA spreads started the year at 80 basis points (bps) to the Treasury Curve and reached 125 bps during the time the 2Q 2022 survey was conducted. BBB- spreads widened from 365 bps to 515 bps during this same time.
Nine of the 10 questions posed to the BOG saw negative shifts from the prior quarter. The questions with the most significant movements revolved around the forward-looking sentiment for demand for CRE and multifamily debt and equity and the trends in capital availability.
Sentiment for the U.S. economy remained sharply negative, with 83% saying the economy will perform worse over the next 12 months. This compares to 75% who felt this way in 1Q 2022 and 35% in 4Q 2021.
The Board also shifted its outlook for borrower and investor demand. In 1Q 2022, only 13% believed there would be more demand for CRE and multifamily debt, with 35% feeling there would be less demand. In the current survey, only 9% believed there would be greater demand, with 60% believing there would be less demand. Similar trends were observed in the Board’s view of investor demand for CRE and multifamily equity.
The current survey also indicated a shift in capital availability and its impact on the performance of CRE finance-related businesses. In 1Q 2022, 31% felt trends in capital availability would positively impact CRE finance-related businesses, with 23% saying the impact would be negative. Only 6% felt there would be a positive impact in the current quarter, with 36% saying it would be negative.
Finally, sentiment for all CRE finance businesses shifted from neutral to negative in the current quarter, with 53% holding an unfavorable view and only 9% holding an optimistic outlook. In the previous quarter, 29% answered negatively, with 52% saying the industry would stay the course.
“This most recent survey reflects the caution in the market,” said CREFC Board of Governors Chair Leah Nivison. “Markets are reacting to macro risks, including the Fed’s actions and its ability to minimize the economic impact of higher rates. Lenders are now more selective as they adapt to the challenges of originating loans at higher coupons and lower valuations.”
