CRE MARKET CONFIDENCE INDEX
JUNE CONFIDENCE INDEX REFLECTS A MARKET ON THE MEND AMIDST GREAT UNCERTAINTY
The LightBox Market Confidence Index in June continued to reflect the market’s transition away from the widespread worsening of conditions in April toward early steps down the path to recovery. The most dramatic change in respondents’ sentiments in June was a collective sense that commercial real estate hit bottom in April and is now largely “stabilizing” or “improving,” driving the index from
108.2 in May to 142.4 in June (April 2020 base=100). The percentage of respondents reporting that their own activity was improving over the prior month increased dramatically from only 17% in May to 51% in June. As employees in some metros venture back into their offices, a growing number of stakeholders are beginning to re-initiate property deals that were stalled during the market shutdown, but many respondents acknowledged that the pace of recovery is slow. Concerns about rising COVID-19 infections in many states over the past month, however, are injecting uncertainty into the market forecast and could drive down July readings. As we move past the mid-year mark, the percentage of respondents forecasting a return to pre-pandemic levels in the fourth quarter of 2020 or later increased from 47% to 55%, likely reflective of the significant unknowns related to the possibility of a spike in infections, whether federal stimulus will continue, the extent of unemployment, the pace of recovery in property markets and other factors.
Overall Market Conditions
One of the most significant changes in June was a jump in the percentage of respondents who view commercial real estate market conditions today compared to last month as “improving,” leaping to 35% in June from only 3% in May. At the other end of the spectrum, the 87% of respondents experiencing “worsening” market conditions back in April fell to 57% in May and 20% last month. It is clear from the June results that the sentiments of real estate professionals across the U.S. are improving, but still extremely cautious.
Respondents’ CRE Activity
Also reflecting a swing to the positive view of the market was June’s measure of how respondents’ own activity was shaping up in this early stage of recovery. Asked how they would characterize their organization’s own activity versus the previous month, 42% of respondents reported that activity is “increasing slightly”—a marked improvement over only 15% in May. Those expecting activity to be “decreasing slightly” in June fell to 14% compared to a more significant 30% in May. Only 7% expected their activity to be “decreasing substantially” compared to 26% in May and a much more significant 46% in April. It is worth noting that more than half of respondents (51%) anticipate their CRE activity in July to outperform June levels, and only 13% expect a decrease.
Although respondents are more optimistic about the overall state of the market and their own business activity, this optimism is not yet translating into a willingness to hire new employees. One change, however, and a positive one – is that far fewer respondents work at companies that are reducing their work force (10% in June vs. 22% in April). A significant 83% of respondents are at firms where staffing is stable, and many are starting to bring back furloughed workers.
The results of these monthly surveys reflect widely disparate views as the market impacts felt across the U.S. are a function of the rate of COVID-19 severity. Based on the June results, respondents were operating at an average 71% of their typical capacity, and 9% reported being back to their full pre-pandemic capacity, likely in states that were hit less severely by COVID-19. Overall, one-quarter of respondents expect to return to pre-pandemic levels by the fourth quarter and another 31% expect recovery to be delayed until 2021. Still others think it might take even longer. One respondent shed light on the significant uncertainty, noting “It is hard to know at this point. It looks kind of bleak, but things could improve going forward.” In a note of optimism: “The pandemic and associated lockdown squashed demand. As the lockdown is being lifted, demand is coming right back. Everyone we speak with is anticipating things will pick up very quickly.” Despite the increase in this month’s index, the optimism is guarded: “The number of inquiries by firms seeking advice on the market is up. It is a feeling-out period, but there’s a great deal of uncertainty so clients’ attitudes are tempered with caution about a possible second wave of the pandemic necessitating further economic contractions.”
As recovery begins to take hold, respondents still put industrial/warehouse/distribution at the top of list of asset classes getting attention (64%) followed by multifamily (52%) and vacant land (39%). The next few months will be very telling as some respondents expect to see foreclosures begin to increase as tenants have difficulty filling vacancies and paying rents the longer unemployment continues.
About the Market Confidence Index
The LightBox Market Confidence Index reflects prevailing business conditions across the commercial real estate sector and likely developments for the months ahead. This summary is derived from a monthly survey that asks participants for views on the overall market, their own operations in the current month and expectations about future business activity. The June survey sample consisted of environmental consultant/engineers (77%), appraisers (14%), brokers/investors (7%) and commercial real estate lenders (2%). The Market Confidence Index is calculated based on respondents’ answers to three questions about overall conditions, their activity in the current month and staffing plans. The weighted score is then normalized to the index baseline of April 2020, the first month of data collection.