As we quickly close out 2022 and approach the new year, many investors find themselves caught in-between 2022’s impressive gains and the looming concerns of a financial recession. For commercial real estate, 2022 proved to be a positive year across the board.
The industrial and apartments sectors led the way, climbing a respective 28.6% and 23.3%, measured year-over-year in May. Retail grew 18.8% year-over-year while commercial office rose 12.2%. While the office sector stood behind industrial and apartments, it still posted its fastest annual gain since 2014.
2022’s impressive trends have many professionals in the investment real estate space expecting more of the same this new year. There is a lot to cover in regard to the current and upcoming state of the market. Let’s dive right in.
2022 Commercial Real Estate Interest Rate Hikes
A pinnacle of 2022 was marked by the Fed’s raising of interest rates by three quarters of a percentage point. As the Fed pumped the brakes in response to startling inflation rates, many investors were left wondering what the future would hold for capital markets.
Lenders, investors, and consumers all around prepare for the impact of continuous rate hikes in the year to come. The Fed’s latest move has officially taken borrowing costs back to the pre-pandemic levels of 2019. As consumers anticipate further rate hikes well into 2023, we are all left facing questions of uncertainty. When will the markets react and how volatile will the reaction be?
2022 Sentiment Index Report
The CRE Finance Council – representing the entirety of the $5.1 trillion commercial and multifamily real estate industry – recently announced the 2022 Sentiment Index.
The official report showed overall sentiment dropping sharply by 12% so far in 2022. Quarterly, this has been the third-largest recorded drop, following a 31% decline in early 2020 and a 23% decline in the Q1 of 2022. On the surface, the numbers are startling. However, given rising inflation, rate hikes, and larger spreads, most CRE professionals had already anticipated the decrease in sentiment.
It’s important to take a look at the sentiment facing the broader market as a whole as well. The CRE Financial Council reported several other statistics in 2022’s Sentiment Index:
- 83% sentiment saying the U.S. economy will perform worse over the next 12 months. This contrasts sharply to the 35% reported only a year ago.
- 60% of CRE professionals believe there will be less demand for CRE and multifamily debt in the next 12 months, as compared to only 33% a year ago.
- Only 6% of those surveyed felt that capital availability would have a positive impact on CRE finance-related businesses. In 2021, more than 31% felt capital availability would positively impact CRE finance-related businesses.
Possibly the most startling statistics gathered in the Sentiment Index were those surrounding CRE finance businesses as a whole. For the first time since the pandemic, quarterly sentiment overall shifted negative. 53% of CRE professionals held an unfavorable view on the market; only 9% held an optimistic outlook.
The Board of Governors that oversees the Sentiment Index reported that, “this most recent survey reflects the caution in the market. Markets react to macro risks, including the Fed’s actions and its ability to minimize the economic impact of higher rates.”
The current numbers are undoubtedly cause for concern heading into 2023. At the same time, the Board’s statements have left many feeling as though the market sentiment will shift back to positive as the Fed halts interest rate hikes sometime next year.
Impact of a Bear Market on Commercial Real Estate
The stock market has taken a beating in 2022. The S&P has taken over a 25% beating in the last year. The good news, as Yahoo Finance executive, Brian Sozzi points out, is that “the S&P 500 has been higher three years later in eight out of nine cases, in which the index has fallen 20% or more.” Sozzi also noted that in those same instances, the market has rebounded sharply in only the next 12 months seven out of nine times.
Historical patterns may point towards an optimistic future. However, with the stock market officially plunged into bear market territory, many investors are left wondering where to put their capital to capture the best ROI.
Transitioning back to CRE, many investors are finding benefit in today’s volatile markets. As sellers continue to take advantage of the 1031 exchange tax advantages, real estate still provides lucrative long-term investment alongside a reliable hedge against the market’s current state.
CREXI reports that commercial real estate is likely to see continuous trading, only at a slower clip than we’ve seen in the last 12 months. Despite larger economic concerns, the buying and leasing activity in industrial, multifamily, and office assets has proved CRE can weather the storm.
Here are a few statistics that show the trends heading into 2023:
- Average Asking Price per SF: $236.82, down from $278.49 in Q2.
- Median Closed Cap Rates: 6% flat, up from 5.8% in Q2.
- Average Occupancy Rate: 80.45%, down from 83.31% in Q2.
- Median Sale Price: $323k, down from $357k in Q2.
Overall, market data is trending down quarter-over-quarter. However, CRE is still positive on the year with the average asking price per SF up over 14%. Offers are still increasing substantially, with nearly 30% annual gains in deals going under contract.
Looking for more information on the Commercial Real Estate Market in 2022 and 2023?
Current economic uncertainty may have slowed the market, but it hasn’t brought it to a halt completely – nor is it expected to. Major metro areas, like those surrounding Phoenix, are still commanding record sky-high prices. Paired with the stability in the commercial real estate market overall, this brings opportunity for both buyers and sellers.
Our team at ICRE Investing has a diversified and lengthy experience in commercial real estate in Phoenix. We also have access to commercial properties across the globe. Feel free to contact us for more information today!