Higher-for-Longer Rates Spook CRE Investors, per the Burns + CRE Daily Fear and Greed Index

By Alex Thomas and Alexander Shaban

Commercial real estate (CRE) investors became even less optimistic this quarter, largely because optimism over declining rates has waned.

The Burns + CRE Daily Fear and Greed Index, created in collaboration with CRE Daily, reflects sentiment across various CRE sectors, including multifamily, industrial, retail, and office. This survey provides insight into whether values and development will likely increase or decrease and is one of the factors we consider when forecasting multifamily construction.

The 1Q24 survey findings are available for download.

Despite reportedly having plenty of capital to invest, the percentage of investors planning to increase their CRE exposure fell from 54% to 43% this quarter. Investors view industrial and retail investments much more favorably than office and multifamily investments.

Our proprietary survey, which drives the Fear and Greed Index, measures how commercial real estate (CRE) investors are:

• Increasing or decreasing their CRE exposure
• Expecting to change their CRE exposure over the next six months
• Accessing capital for CRE investments

The 1Q24 Fear and Greed Index remained stable at 52 out of 100 (up from 51 in 4Q23), with sector values ranging from 42 (office) to 56 (industrial). Index values below 45 indicate a contracting market, above 55 indicate an expanding market, and between 45 and 55 indicate a balanced market.

Key insights from over 1,400 market ratings by CRE investors

1) Holding pattern: 68% of CRE investors are maintaining their current exposure, up from 66% in 4Q23 and 49% in 3Q23. Only 20% are increasing their CRE exposure, and 12% are decreasing their exposure. There are very few willing sellers right now, partly because buyers are bidding conservatively.

2) Decreased asset values: Investors believe asset values have decreased year over year for all major asset types, though their estimated declines have become less steep over the last few quarters. This sentiment data is valuable because actual CRE transactions are currently scarce, which can obscure the true declines in value.

3) Multifamily and office declines: Due to sector-specific challenges, investors foresee continued price declines in multifamily and office.

4) Retail and industrial values expected to grow: Investors expect retail and industrial asset values to grow or remain stable by year-end 2024, driven by strong sector fundamentals.

5) Urban asset decreases: Investors expect larger value drops for urban multifamily and office assets in the next six months, driven by high vacancy rates and decreased demand for downtown living.

• Elevated vacancy rates continue to challenge urban office properties, particularly in central business districts in markets where work-from-home arrangements are more common.
• Fewer office workers in downtown areas have also lowered the premium for downtown living, leading to the larger expected declines in urban multifamily asset values, estimated at -3%.

CRE investors expect headwinds until interest rates drop significantly, which is becoming less likely.

High capital costs and rising expenses (insurance and taxes) are impacting all CRE sectors. Sector-specific issues like work-from-home (office) and oversupply (multifamily) exacerbate these challenges.

JBREC covers the CRE markets, from identifying the best markets for new apartment communities to using migration data to track in-demand retail spaces.

Our?research team?provides clients with timely insight into the market’s direction, guided by our housing and economic forecasts for the for-sale, for-rent, and building product markets. We will track shifts in sentiment across commercial real estate and keep you informed.

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