Investors Hold Amid Market Chaos: ValTrends 4Q 2022

Chaos in the capital markets is dramatically eroding sentiment for commercial real estate (CRE), with a record number of investors saying they would prefer to hold assets rather than buy or sell, according to the latest quarterly ValTrends report, “Holding Pattern." Peter Muoio, PhD, Head of SitusAMC Insights, and Jen Rasmussen, PhD, Vice President, SitusAMC Insights, presented highlights of the 4Q 2022 report at the ValTrends webinar on March 14, 2023. 

Investors are waiting to see how higher interest rates and potentially slowing economic growth will change pricing, transaction activity and space market conditions, Muoio noted. Transactions have stalled, and the few that have occurred are skewed in a dumbbell pattern -- distress and special-story high valuation properties -- providing little guidance on where prices stand. 

"There's so much murkiness about what's happening with interest rates and recession," Muoio said. "With this lack of information and guidance, investors believe the best thing to do is stay in place."  

Echoes of the Great Financial Crisis   

SitusAMC data show that CRE yield spreads over the 10-year Treasury are the narrowest since the Great Financial Crisis (GFC). Commercial real estate returns tumbled into negative territory in 4Q 2022. Total returns fell to their lowest levels since the GFC, as did capital appreciation, and income returns were the second lowest since NCREIF began collecting the data in 1978. On-the-ground intel from SitusAMC's valuation professionals suggests further retreat in the first quarter of 2023. SitusAMC Insights is forecasting capital returns to decline 10.7% by the end of 2023. 

In addition, the availability of capital -- equity and debt combined -- dropped for the fifth consecutive quarter to the lowest level since the GFC, and underwriting is more restrictive. "Both the availability and discipline of capital are starting to flirt with levels we saw in the GFC," said Muoio, adding, "bank failures are not the only thing reminding us of the GFC these days." 

But space market fundamentals have not shifted much. "The fundamentals for many segments are relatively healthy, which supports a positive long-term outlook for the CRE market," Rasmussen said. The ValTrends report provides an in-depth performance data for the apartment, industrial, retail, office and hotel sectors, including total return, occupancy change and rent growth.  

Surprising Retail Rebound  

Some 43% of survey respondents called multifamily the best property sector in 4Q 2022, followed by retail at 40% -- a huge rebound from a year ago, when just 12% favored the sector. "Retail never saw the froth of the other property segments so there's less of a bubble being burst," Muoio explained. "There's very little construction, we are out of Covid, people are back into stores, and we know there will be a continued mix of online and bricks-and-mortar retail." 

Some 86% of investors named office the worst property type. The market continues to assess the impact of hybrid work on long-term demand, along with cyclical weakness and layoffs in the tech sector, Muoio noted. Kastle data shows office occupancy varying by days of the week -- with the highest traffic on Tuesday and Wednesday -- and big variations by geography, with more workers coming to offices in Texas than California. Meanwhile, new completions are expected to face historically low absorptions. 

 "Office demand is still relatively low," Rasmussen said. "We are going to see a shift in what stabilized occupancy really means for the office sector."  

The ValTrends report, "Holding Pattern," offers a comprehensive look at SitusAMC's proprietary insights on valuation trends and space market fundamentals, as well as exclusive survey data on investor appetites for CRE versus bonds, equities, and cash. Download the free, 28-page report here. Access the ValTrends Quarterly webinar presentation here. Learn more about SitusAMC’s research and data offerings here.