C-suite executives and other high-level real estate pros agree that the country’s real estate market has crashed in the wake of the COVID-19 pandemic and state-mandated social-distancing and shutdown orders. But these same execs also said that most real estate sectors appear to be at or near their bottoms, meaning that the industry might return to growth mode during the next several quarters.
That was the big takeaway from the the RCLCO Real Estate Advisors‘ Mid-Year 2020 Sentiment Survey. The survey of hundreds of C-suite executives and other leaders in various sectors of the real estate industry didn’t sugarcoat the challenges that the commercial real estate market faces today. But it did offer a bit of hope: Things are bleak right now, but several CRE sectors appear poised to begin their recoveries soon.
“This isn’t a cycle that we’re in,” said Brad Hunter, managing director at RCLCO. “It was a sudden stop. “Many sectors of real estate leapfroggd entire stages of the normal real estate cycle and went straight to the bottom.”
But Hunter said that the results of the survey aren’t all negative.
“The good part about that is, as they say, you can’t fall off the floor,” Hunter said. “The real estate executives and developers that responded in this survey feel the worst is behind us, at least for many sectors of real estate.”
RCLCO generates its Current Real Estate Market Sentiment Index, or RMI, from its twice-yearly survey results. The RMI for mid-2020 plunged to an all-time low of 9.2. For perspective, the previous low RMI was recorded in the fourth quarter of 2018, when this figure hit 37.5 in the wake of the shutdown of the U.S. federal government in December of 2018.
In the fourth quarter of 2019, the RMI came in at just under 65. That, of course, was before the COVID-19 pandemic hit. RMI values in the 60 to 70-plus range are typically indicative of very good market conditions. Values under 30 are usually coincide with periods of economic and real estate market stress or recession.
But what about the future? RCLCO’s Future RMI hit a higher 36.8. This indicates that while survey respondents see continued declines in economic conditions, they also see the beginning of recoveries in at least some real estate sectors within a year.
Here’s another sign of hope: Less than 16 percent of respondents said that they believe the markets will be “significantly” worse during the next 12 months.
Most respondents told RCLCO that the multifamily rental, active adult and for-sale residential sectors have already hit bottom. They did say, though, that the seniors housing sector is still in full downturn mode and may need more time before hitting bottom.
During the next 12 months, homebuilders, subdivision developers and master-planned communities are expected by the largest number of survey participants to get past the downtown and move into “stable” business conditions. Respondents said that the hosptitality sector is approaching or at the bottom now, with luxury and resort hotels the most commonly believed to be in “full decline” or “at bottom.” The largest number of respondents said that recovery in the hospitality sector will begin with a year.
Most respondents said that the retail sector was in “full decline” in June. Survey respondents, though, didn’t classify all retail types in the same way. Secondary regional malls were seen to be in the worst shape of all retail asset types. Grocery-anchored community or neighborhood centers, though, were seen by respondents as holding up well even during the worst days of the pandemic.
Respondents said that the office market was still in decline as of the time of the survey. Respondents had varying opinions about the chances of recovery within the next year, reflecting uncertainties about the economy and the durability of the work-from-home trend.
The pandemic, though, was seen as having boosted at least one CRE sector: industrial. Respondents said that industrial has become even more important thanks to the increased demand for deliveries during the COVID-19 lockdown. Respondents said that cold storage and last-mile warehousing have been particularly strong during the pandemic.