CREFC Third-Quarter 2022 Survey Shows Fifth Consecutive Drop in Overall Sentiment on CRE Finance Markets

NEW YORK, Nov. 9, 2022 /PRNewswire/ -- The CRE Finance Council (CREFC), the industry association that exclusively represents the $5.4 trillion commercial and multifamily real estate finance industry, today announced the results of its Third-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 nine core questions on the state of the CRE finance market. The Sentiment Index was initiated in the fourth quarter of 2017, originally consisting of 10 questions, and thus tracks markets pre-COVID, during COVID, and today as we continue to recover from the worst of the pandemic's impact.

3Q 2022 Survey: Concerns Across Various Fronts Continue

Overall sentiment dropped again, from 70.7 in 2Q 2022 to 61.4 in 3Q 2022, a decline of 13%. This is the fifth consecutive decline and follows a 12% drop in overall sentiment last quarter. The most recent quarter's results were not altogether surprising, given the uncertainty surrounding inflation, rising interest rates, and the looming potential for a global recession.

All but one of the questions posed to the BOG saw negative shifts from the prior quarter. The questions with the most significant movements revolved around expectations for CRE fundamentals, the impact of trends in CMBS and CRE CLO demand/spreads, and the overall outlook for CRE finance businesses. 

Sentiment for CRE fundamentals saw a meaningful shift in 3Q 2022. In the prior quarter, 34% of the Board was negative on fundamentals, with 55% indicating there would be no change. In the current quarter, 83% of the Board expects CRE fundamentals to worsen, a 49-point jump.

The Board also saw a more significant negative shift in trends in CMBS and CRE CLO demand/spreads and their impact on CRE finance-related businesses. In 2Q 2022, 49% believed there would be a negative impact, with 40% remaining neutral. In the current survey, 75% held a negative outlook, with only 21% remaining neutral.

Finally, sentiment for all CRE finance businesses continued to worsen. In 2Q 2022, 9% indicated a positive outlook, with 53% expressing a negative view. Only 2% answered positively in the current quarter, with 89% holding an unfavorable view.

This quarter's survey also included two open-ended questions for the Board, separate from the questions comprising the Index. The new questions sought to gain Board insights on topical issues facing the market. The first question asked the Board's opinion on future distress in CRE loans based on a recent article by Trepp stating that some 3,000 loans totaling $53 billion with a DSCR of 1.25x or lower are scheduled to mature over the next two years. Most responses indicated that upcoming loan maturities would drive special servicing rates and losses higher. However, some on the Board held that losses would be muted, given the amount of capital on the sidelines, disciplined underwriting, and value creation over the last 10 years. Others held that there would be pockets of distress but that losses would be far lower than those during the Global Financial Crisis.

Finally, members were asked about the potential for the United States to experience a recession in late 2022 – 2023. Not surprisingly, 92% of the Board answered in the affirmative.  

"This most recent survey accurately captures the concerns of the industry at large at this time. The Fed continues to raise rates, inflation persists, and the potential of an economic downturn remains top of mind," said CREFC Executive Director Lisa Pendergast. "The shape of the commercial real estate debt market changed very quickly in the third quarter, and the surveyed responses reflect that swift shift. We remain optimistic, however, that despite the increased likelihood of a recession, we are in a much better position and stronger place than we were as an industry in 2008. We will continue to be a resource and a voice for our industry and members in these uncertain times."  

About CREFC's Board of Governors Sentiment Index

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 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.

Contact:
Morgan McGinnis
[email protected]

SOURCE CRE Finance Council