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Inflation and recession predictions, top CRE threats and what lies ahead in 2023

LightBox Profile
LightBox Insights
December 12, 2022 4 mins

Tina Lichens, senior vice president of broker operations at LightBox, recently shared her views with Real Assets Advisor, part of Institutional Real Estate, Inc. (IREI), on top threats to the commercial real estate (CRE) industry and which sectors she believes will come out on top of the recession. Below is a summary of the interview her commentary.

It’s clear the U.S. faces a recession—but what kind?

Everybody I talk to assumes we are either in a recession or on the verge of one, but that’s a distinction without a difference. Despite the recent CPI news, all indications point to a recession. Inflation is still high and consumer confidence is low. The labor market is not looking good. The market is clearly weakening and we’re seeing significant layoffs across the industry.

Ninety percent of the survey respondents in the LightBox Fall 2022 Investor Sentiment Report said they believe a recession is coming, and that would probably be closer to 100 percent if the survey were held now. But it’s unclear what kind of a recession we’re going to see, how hard it will be and how long we’re going to continue to see negative indicators. None of our clients that we’re talking to predict a soft landing. And of course, interest rates have a huge impact on firms’ ability to carry out transactions.

People are having to get creative to complete deals right now, but the expectation remains that rates will probably continue to rise through the first part of 2023 and peak in midyear. Many lenders have pulled back completely or are tightening standards until the market normalizes. This will have a huge impact on the real estate business.

Aside from interest rates and inflation, other concerns include supply chain disruption, specifically for construction materials and labor shortages, which are threatening companies’ ability to get new product on the market, as well asreposition existing assets on schedule and on budget.

Buyer activity is declining and there will be less need for office space

Several asset classes are likely to struggle. Listing volume and buyer activity has fallen pretty dramatically since last year at this time. The LightBox RCM platform has seen a 35 percent decrease in deals over the last three months compared to last year. And that’s across the board, all asset classes.

Some of our broker clients are telling their clients to wait and see. Many major investment brokers have announced disappointing earnings and are in cost-cutting mode, which should be the case until the second half of next year.

We’re also seeing a decline in buyer activity as measured by non-disclosure agreements signed. The average number of NDAs has continued to decrease since June of this year, and probably won’t rise until the first or second quarter of next year. Even if volume picks up earlier, we’ll continue to see downward pressure on prices because of the higher cost of borrowing. Moody’s recently said that 23 percent of commercial mortgage-backed securities coming due in 2023 are unlikely to be refinanced, which will lead to further distress. Anecdotally, we’re getting more inquiries about our auction platform, including for office assets, retail, and even hotels. Selling now at auction is more profitable or maybe even the only option if the owner can’t refinance.

It’s not gloom and doom in every sector

Amid the distress, there are some bright spots. The industrial sector has solid fundamentals. Strong demand, low vacancies—around three percent—and high expected rent growth paint a great picture relative to other asset classes. In multifamily, apartment rates are still rising, though not as much or as quickly as in the past, and vacancy is the lowest we’ve seen in 40 years. So even if 10 percent rent growth is in the rear view mirror, it’s still very attractive compared to other asset classes.

Leisure and hospitality are in good shape, specifically the leisure travel space. And office is still being recalibrated. Tenants and owners are trying to reimagine their current spaces. Medical office, healthcare and skilled nursing are bright spots—some of those niche asset classes are seeing increasing rents and expecting strong sales next year.

Eventually companies will figure out the right balance between remote and in-office work. Businesses will have to determine how to best use their space to support hybrid approaches and foster collaboration. As the labor market tightens, employers will have more leverage to mandate that staff return to the office. While the general consensus is that there’s just going to be less need for office space, the question is how much less? Ten percent? Twenty or 30 percent? I think we’ll have more clarity on that issue during the coming months.

I don’t foresee a long protracted period of continued uncertainty and volatility, but I think the next four to six months are going to be challenging. Once we reach the middle of 2023, I believe the industry will have stabilized and business will be carrying on as normal.

To watch the on-demand video of this interview on IREI’s website click here.

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