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The LightBox Fall 2022 Investor Sentiment Report: Investors seek out opportunities as economic issues continue to impact capital markets

Tina Lichens
October 31, 2022 4 mins

LightBox released its Fall 2022 Investor Sentiment Report, which takes stock of issues affecting the commercial real estate sector. Survey respondents came from six segments: brokerage, investment, lending, property due diligence, valuation and other.

According to the report, “Significant market headwinds, including a slowdown in economic momentum, rising interest rates, ongoing supply chain disruption, labor shortages and the threat of a recession are adversely impacting investor sentiment heading into the year-end. As financial markets react to the Fed’s ongoing efforts to tame inflation, many commercial real estate investors and lenders are recalibrating, stepping back or taking a more cautionary approach to investment activity. This sentiment strikes a notable contrast to the optimistic forecasts voiced at the beginning of 2022, when many industry experts expressed confidence in a strong growth trajectory for the year. Those optimistic projections became obsolete by mid-year, however, as rapidly changing economic conditions ushered in a wave of uncertainty.”

Below are key takeaways from the report:

Inflation and Recession are Top Concerns

There is growing concern about whether the Fed’s efforts to raise interest rates to tamp down inflation will produce the desired results without triggering a recession. Survey respondents overwhelmingly voiced concern about a recession—only 10% were unconcerned about the possibility. Yet commercial real estate continues to provide a strong hedge against inflation, especially those sectors experiencing strong demand, such as industrial and multifamily.

The Office Market Is Focused on Developing Hybrid Work Strategies

The office market is in the midst of significant upheaval, as companies of all sizes try to develop hybrid remote/in-person models that suite their organization and meet employee needs. There is no “one size fits all” approach, and the consistent results could years to materialize. The adoption of hybrid work is expected to have a lasting impact on the office sector, affecting managing decisions related to employment, office space use, and company culture. Industry data show a slow uptick in employees returning to the office, a trend that is more common in large urban metro areas.

Office Investment: Sales Are Up, But Pricing Lags

U.S. office sales volume regained some ground in 2022, although pricing per square foot still lags as
the industry grapples with the impact of changing work patterns—including a shift to remote work and suburban offices versus in-office work in urban centers—during the pandemic. The long-term outlook is murky, given myriad economic and return-to-office variables. The Counselors of Real Estate projects a 30% long-term aggregate devaluation in U.S. office properties, although there are outliers as tech firms such as Google double down on urban office space.

In the Industrial Segment, Demand Outstrips Supply

The rapid acceleration of e-commerce and related reliance on modernized logistical operations continue to drive significant activity in the industrial sector. As retailers try to better position themselves to store and deliver goods near growing population centers, industrial space usage is rising in many markets, often resulting in vacancy levels below three percent. Demand for industrial space is far outpacing supply, even with a projected softening of consumer spending due to recessionary factors. There is more than 800 million square feet of pent-up incremental demand in the U.S. market, yet only 375 million square feet are coming online.

Material Costs Are Fueling Uncertainty

The availability and pricing of key construction materials continues to be challenging, and additional shifts and unpredictability are expected. According to the Associated General Contractors of America (AGCA), the price of materials and services used in nonresidential construction declined by 1.1 percent from July to August of 2022 due to a steep drop in fuel prices that masked increases in the cost of other construction inputs. The cost of materials such as cement increased 10% year-over-year in August while copper decreased by 7.1% and lumber and plywood prices rose by 7% over the same time period.

Labor Shortages and Construction Delays Persist

A labor shortage continues to create challenges throughout the development cycle, slowing project starts and completions and increasing development costs. According to a recent AGCA/Autodesk survey, 91 percent of general contractors report having difficulties filling some or all of their open positions. These labor issues are creating problems for an already chaotic supply chain that has experienced inflated material costs and construction delays over the past several years. These issues are delaying the supply of new buildings.

Conclusion

As 2022 draws to a close, interest rates—and their impact on transaction volume and taming inflation—are the key variables affecting the outlook for commercial real estate. Given the uncertainty around future increases and whether fiscal policy succeeds in controlling inflation without a recession, many investors, brokers and lenders expect pricing to adjust, eventually leading to renewed momentum.

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