Given inflation, 'subdued sentiment' abounds.
CBRE’s 2023 US Investor Intentions Survey released on Thursday reveals “subdued sentiment” among commercial real estate investors – with nearly 60% expected to purchase less real estate this year and just 15% planning to buy more.
“Almost half of respondents expect to decrease purchasing by more than 10%,” researchers wrote. “Investors are also hesitant to sell assets as market pricing falls. Sixty per cent (60%) say they will either sell less or not sell at all, while only 27% expect to sell the same amount as last year.”
Sentiment among lenders has soured as well, the survey found. The survey found nearly 60% of respondents expect to decrease lending activity this year. However, just 10% plan to meaningfully reduce their allocation to real estate, while 67% said they will either maintain or increase capital availability for the sector.
“CBRE expects that the slowdown in investment and lending activity in the first half of the year will lower total investment volume in 2023 by approximately 15% from 2022,” the authors wrote. “However, as Federal Reserve policy and economic conditions become more predictable around midyear, we expect investment and lending activity to recover.”
When will inflation come down in 2023?The key considerations for buying and lending expectations this year are when inflation will peak and where interest rates will end up, according to the survey. About 50% of investors believe inflation will peak in Q1 or Q2, while 35% believe it has already peaked. Along with high inflation, most investors expect higher borrowing costs. More than 70% of surveyed investors believe the 10-year Treasury rate will exceed 3.75% at year-end 2023.
Lenders shared a similar outlook on inflation, with 48% of those surveyed believing it will peak in Q1 or Q2 and 33% believing it has already peaked. Lenders also expect higher borrowing costs, but to a lesser degree than many investors. More than 50% of surveyed lenders believe the 10-year Treasury rate will exceed 3.75% by year-end, while 43% believe it will finish the year between 3.00% and 3.75%.
Both investors and lenders highlighted rising interest rates as a key challenge for commercial real estate activity in 2023. Uncertainty about the direction of interest rates will limit real estate investment activity, particularly in the first half of the year. Nevertheless, CBRE believes that inflation and borrowing costs will not be as high as many investors and lenders expect. We forecast that the 10-year Treasury rate and inflation (CPI) will end the year at 3.2% and 4.0%, respectively.
What is the most profitable sector of real estate?
Where is the best place to invest in 2023?
Both investors and lenders indicated a strong preference for fast-growing secondary markets, particularly in the Sun Belt, including Austin, Texas; Atlanta; Miami; Nashville, Tenn.; Charlotte, N.C.; San Diego, Calif.; and Raleigh, N.C. Many investors expect these markets to outperform in 2023. Other preferred markets included Los Angeles and Dallas/Fort Worth.