Dianne Crocker: Recession fears have housing market forecasters hitting the reset button: Broadband breakfast

The lyrics to The Talking Heads’ “Same As It Ever Was” certainly don’t apply to how 2022 is unfolding in the commercial real estate market. Two quarters of negative economic growth have clouded market sentiment and raised fears that the US economy is heading into a recession. Midway through the year, market analysts were taking a hard look at their bullish outlook for the start of the new year and redrawing the lines.

Once upon a time…

At the start of 2022, forecasters were on the upside expecting commercial real estate investment and lending levels to be nearly as good as 2021. This was significant, given that 2021 set new records for the volume of transactions and loans as debt and equity accumulated. during the pandemic while looking for a home in US commercial real estate.

What a difference a few quarters made. Virtually all of the predictions that started the new year were outdated by midsummer. The abrupt change in market conditions is palpable and has surprised just about everyone. Today, markets are reaching an inflection point that contrasts sharply with last year’s strong rebound.

The two I’s: inflation and interest rates

At the heart of the recent upheaval in market sentiment is the persistence of high inflation, which seems to ignore all attempts by the Federal Reserve to raise interest rates and lower prices. Rising inflation has a ripple effect throughout the economy, driving up the costs of building materials, energy and consumer goods. Notable economic indicators showing mid-year strains include GDP, which fell for the second consecutive quarter, and the consumer price index, which jumped 9.1% year-on-year. the other in June – the biggest increase in about four decades.

In July, the CPI fell to 8.5%, an encouraging sign that inflation was starting to stabilize. In LightBox’s latest August report, however, hopes were dashed when the CPI showed little improvement, holding at a still high 8.3%.

The market reacts to a higher cost of capital as lenders put the brakes on. As the cost of capital rises with each rise in interest rates and fears of a recession intensify, many major U.S. financial institutions are withdrawing their loans for the remainder of 2022 and into 2023. This change in tenor is a significant change, given that 2021 was a banner year for commercial real estate lending. Many lenders have already shifted to a more defensive underwriting stance as they seek to mitigate risk.

The Mortgage Bankers Association, which previously predicted lending levels in 2022 would cross the $1 trillion mark for the first time, revised its forecast down in mid-July. By the end of the year, the MBA now expects volume to be significantly 18% below 2021 levels, and a third below the bullish forecast made in February. Today, investment activity is slowing as higher borrowing costs drive some buyers out of the market.

In the investment world, deals were down 29% mid-year due to a shrinking buyer base as rising rates impact investors’ access to capital. loan. Market volatility is causing investors, lenders and owners to rethink their strategies, reconsider their assumptions and prepare for possible disruptions.

In anticipation of the end of the year and 2023

Rapid and varied market changes make forecasts uncertain and certainly a more cautious investment environment. The battle between inflation and interest rates will continue in the short term. As LightBox’s investor, lender, appraiser and environmental due diligence clients evolve into the 4e quarter – usually the busiest quarter of the year – unprecedented volatility is causing them to recalibrate and re-forecast given recent market developments.

Continued weakness in trading volume is likely to continue as rates and valuations re-equilibrate. If property prices start to stabilize, there will be more pressure on buyers to think about how to improve a property to get their return on investment. The next chapter in the commercial real estate market will be defined by how long inflation lasts, how high interest rates are, and whether the economy slips into a recession (and how deep). The biggest areas of opportunity will be in asset classes like office and retail that are moving away from traditional uses and transforming to meet the needs of today’s market. Until the barometers stabilize, it is important to rethink assumptions, monitor developments and recalibrate if necessary.

Dianne Crocker is LightBox’s Principal Analyst, providing strategic analysis, risk management best practices, market intelligence reports, educational seminars and custom research for stakeholders in commercial real estate transactions. . She is a highly respected expert on commercial real estate market trends. This piece is exclusive to Broadband Breakfast.

Broadband Breakfast welcomes comments from knowledgeable observers of the broadband scene. Please send pieces to [email protected] The views reflected in expert opinions do not necessarily reflect the views of Broadband Breakfast and Breakfast Media LLC.

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