CREFC First-Quarter 2022 Survey Shows Broad and Meaningful Drop in Overall Sentiment on CRE Finance Markets

NEW YORK, April 19, 2022 /PRNewswire/ -- The CRE Finance Council (CREFC), the industry association that exclusively represents the $5.1 trillion commercial and multifamily real estate finance industry, today announced the results of its First-Quarter 2022 CREFC Board of Governors' (BOG) Sentiment Index. The Sentiment Index, which was initiated in the fourth quarter of 2017, captures the pulse of a variety of 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 tracks markets pre-COVID, during COVID, and today as we continue to recover from the worst of the pandemic's impact.

Overall sentiment dropped sharply from 105.2 in 4Q 2021 to 80.5 in 1Q 2022, a decline of 23%. This was the second-largest drop in the index after a 31% drop in early 2020, the first survey conducted after the beginning of the pandemic. The results of this quarter's survey were not altogether surprising, given uncertainty surrounding inflation, rising interest rates, the lingering effects of the pandemic, as well as 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 prove to be more aggressive in raising rates than initially planned. On March 16, the Fed raised interest rates 25 basis points (bps) and signaled it would continue to increase rates at each of its six remaining meetings this year. The challenge for the central bank will be to achieve a soft landing – a gradual tightening in financing conditions without triggering a recession.

However, history is not on the side of the Fed and other central banks when it comes to soft landings. There have been 16 monetary policy tightening cycles in the United States, United Kingdom, and Europe since the late 1970s. Thirteen of those have ended in recession. Those 13 misses occurred due to either outside shocks to the economy (such as pandemic or war) and/or central banks being too slow or too timid when they did respond and then having to tighten so aggressively as to trigger a recession. 

• Skyrocketing Benchmark Rates. According to Bloomberg, the $23 trillion Treasury market reported its worst-ever quarterly performance in the first-quarter 2022.
• The 10-year U.S. Treasury yield began the year at 1.63% and, by the time the 1Q 2022 survey was conducted, neared 2.40% and has since climbed to 2.71% as of April 8.  
• The Secured Overnight Financing Rate (SOFR), the floating-rate benchmark replacing LIBOR, also saw significant movement with 1-month Term SOFR beginning the year at 0.06% and rising to 0.41% as of April 8. 

All 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 the U.S. economy, demand for CRE and multifamily debt, and the overall outlook for CRE finance businesses. 

Sentiment for the U.S. economy saw a meaningful shift for the second consecutive quarter. Whereas the previous quarter saw a movement toward neutrality, the current quarter's activity was decidedly negative. The 4Q 2021 survey indicated that 65% of the Board expects the economy to perform better or stay the course; in 1Q 2022, only 25% felt this way, with 75% feeling the economy would worsen.

The Board also tempered its outlook for borrower demand. In 4Q 2021, 59% believed there would be more borrower demand for CRE and multifamily debt, with the remainder feeling it would stay the same. In the current survey, only 13% believed there would be greater demand, with 35% believing there would be less demand.

Finally, sentiment for all CRE finance businesses moderated from the preceding quarter when 62% indicated a positive outlook and only 5% expressed a negative view. In the current quarter, only 19% answered positively, with 52% saying the industry will stay the course. To the good, the Board did not foresee any liquidity concerns and indicated there is ample capital available for borrowers seeking to finance their projects.  

"This most recent survey perfectly captures the industry's mood at this time. There are several once-in-a-lifetime macro risks whose outcome remains uncertain," said CREFC Board of Governors Chairman Eric Thompson of Kroll Bond Rating Agency. "However, real estate assets continue to perform, and while lenders and investors have become more selective, transactions continue to occur, and year-to-date lending volumes are still well ahead of 2021. While volumes may come under pressure, we expect robust liquidity for real estate assets to partially offset downward pressure on values and fundamentals."    

The CRE Finance Council (CREFC) is the trade association for the commercial real estate finance industry. Over 300 companies and nearly 18,000 individuals are members of CREFC. CREFC's members serve a critical role in the US economy by financing office buildings, industrial and warehouse properties, multifamily housing, retail facilities, hotels, and other types of commercial and multifamily real estate.

Nearly 60 senior executives in the commercial real estate finance markets represent CREFC's Board of Governors and hail from every sector of the commercial real estate lending and mortgage-related debt investing markets. CREFC Governors include balance sheet and securitized lenders, loan and bond investors, mortgage bankers, private equity firms, loan servicers, rating agencies, attorneys, accountants, and others. CREFC's Governors serve up to six years on CREFC's Board and are all senior members in both their firms and the industry.

CREFC's BOG Sentiment Index aims to gauge quarter-to-quarter shifts in market conditions for the CRE finance market and the outlook for the future. The Sentiment Index equally weights the responses to each question and then sums those weighted responses to create a single index. Detailed results for each question can be found here. 

Media Contact: 
Morgan McGinnis 
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SOURCE CRE Finance Council