Commercial Real Estate Survey Shows Growing Optimism

Commercial real estate industry sentiment was increasingly optimistic in the third quarter, according to the CRE Finance Council (CREFC). The 3Q 2024 Index saw an 18% increase, surging to 121.1 from 102.4 in the second quarter. This marked the highest reading in the survey’s history since its launch in the fourth quarter of 2017.

According to CREFC, the survey reflected significant optimism over the Fed’s easing of interest rates, the potential for an economic soft landing, as well as the impact on commercial real estate assets and lending market conditions.

The industry association, which represents the $5.9 trillion commercial and multifamily real estate finance sectors, conducted the survey between Sept. 4 and 12 to help provide crucial insights.

While the survey was conducted prior to the Federal Reserve’s Sept. 18 decision to cut interest rates by a half point, respondents weighed in on potential actions and impact. Almost half of the respondents, 47%, predicted a 50-basis-point (bp) cut by year’s end, while 15% said they expected a 75-bp reduction during the same period.

In addition, 60% of respondents said they expect a meaningful recovery in commercial real estate transaction volumes next year as interest rates stabilize. However, concerns remain around office buildings, with 62% saying they expect to see continued declines in property values, especially for older, less-amenitized buildings.

“The latest survey results signal a strong resurgence of confidence within the commercial real estate financing industry,” said Lisa Pendergast, CREFC’s executive director. “Expectations of further Federal Reserve easing, combined with increased investor and borrower demand, suggest market participants are preparing for growth and opportunity through year-end and into 2025. While challenges remain—particularly in the office sector—the overall outlook is more optimistic than in previous quarters.”

Other key findings from the survey include:

• Overall sentiment around the economic outlook remained guarded. Up from 11% in the previous quarter, 32% of respondents said they expect improved performance over the next 12 months. However, 11% said they anticipate worsening conditions;
• The majority of respondents, 85%, said they expect lower mortgage and capitalization rates to positively impact commercial real estate finance and asset values; this is up from 24% in the second quarter;
• Confidence in commercial real estate fundamentals saw improvement, with 40% anticipating better conditions over the next year compared with 24% in the previous quarter;
• Over three-quarters of respondents, 81%, said they anticipate increased investor demand for commercial real estate assets, up from 54% in the previous quarter;
• Borrower demand for financing also saw a boost, with 85% projecting higher loan demand compared with 65% in the second quarter; and
• Up from 46% in the second quarter, 77% said they expect better conditions in the debt capital markets. Positive sentiment also increased for commercial mortgage-backed securities and commercial real estate collateralized debt obligation demand, jumping from 43% to 66% in the third quarter.