Bergstrom Survey – Early 2022

Perhaps 2022 will be the year that our market perceptions stabilize. Following a wildly uncertain 2020 and a surprisingly high-growth 2021, our survey is showing some signs of balance. We will discover over the course of the year if this is the beginning of a return to normalcy or a false signal.

Responses to the current overall outlook question show the most significant move toward balance, albeit with a positive slant. Over the past year, virtually no one saw the real estate market as Very Weak or Weak. The responses were split between Stable, Strong, and Very Strong. Throughout 2021, the weight of the responses shifted from Stable to Strong. This is the pattern that started to revert during 1Q2022.

Figure 1 — Source: UF Bergstrom Real Estate Center

We see in Figure 1 that Strong continues to be the predominant response but some of the high responses from 4Q2021 moved back to Stable. Keep in mind that all responses are still on the positive end of the scale. Virtually no one currently sees the real estate market as Weak. These perspectives were offered before the recent rise in interest rates. Initial responses to the second quarter survey indicate that our perspective continues to soften but remains Stable to Strong.

The overall outlook for housing follows a similar pattern but with much slighter movement. Figure 2 shows a very slight shift from the Strong categories to Stable. The direction of the change is similar to that of the commercial market, but the magnitude is much smaller. More than 80% of our members still view the housing market as Strong or Very Strong during the first quarter.

Figure 2 — Source: UF Bergstrom Real Estate Center

2021 was a year that surprised many of us, not by the fact that the real estate market performed relatively well coming off of the very uncertain 2020, but by the dramatic recovery and expansion that so quickly followed the pandemic year. By the end of 2020, most real estate professionals realized that the market was showing resiliency. Notwithstanding the stabilization during the year, 2020 lost at least half of a year’s production as the world economy was directed to halt. Thus, it is not surprising that 2021 promised better performance but the magnitude of the expansion surprised many of us.

Figure 3 — Source: UF Bergstrom Real Estate Center

Starting mid-year 2021, 85% of our respondents expected More or Much More business in the coming year. Since that time, a gradual trend toward continuing the Same level of business emerged. This pattern continues into 1Q2022, as seen in Figure 3. Even with this move toward maintaining a level amount of business, more than 50% of respondents still expect to see increasing business over the coming year.

Of course, the amount of real estate business that we expect over the coming year is dependent on capital availability in the market. Market activity is stymied during periods of tight capital which often coincide with periods of great uncertainty. During the past year, it seems that investors are quite confident in real estate markets as both equity and debt capital have been increasingly available.

Figure 4a — Source: UF Bergstrom Real Estate Center

Figure 4b — Source: UF Bergstrom Real Estate Center

Equity and debt respond differently to market conditions. Our market participants reveal the magnitude of this difference in Figures 4a and 4b. Equity capital became increasingly available during 2021 to the point that zero respondents described equity as Very Tight or Limited. Throughout 2021, an increasing proportion of respondents described equity as Extensively available over Stable. This trend reversed a bit in the first quarter of this year, leaving the highest proportion still listing equity availability as Extensive but at a level below the 4Q2021 peak. About one-third of our population continuously suggested that equity availability was Growing.

The debt picture is very different than the equity picture. One similarity between debt and equity is the lack of respondents seeing the market as tight. Virtually everyone sees the debt market in the range of Stable to Extensive. However, the relationships between Stable, Growing, and Extensive are significantly different. Throughout 2021, the predominant view was of a Growing debt market with a relatively low percentage viewing the market as Extensive.

From 4Q2021 to 1Q2022, the proportion seeing the market as Extensive remained unchanged at 21% but the proportions reporting Stable or Growing dramatically switched positions. Now, almost half of the market sees debt as Stable with the other half closely split between Growing and Extensive. The debt picture is less consistent and 49% Stable compared to the equity picture which remains steady at 45% Extensive.

Figure 5a — Source: UF Bergstrom Real Estate Center

Figure 5b — Source: UF Bergstrom Real Estate Center

Figures 5a and 5b reveal our respondents’ views as to what smart money should be doing in the current market. Despite the slight moderation in the overall outlook shown in Figure 1, our participants believe that there are increasing opportunities to acquire property. From Figure 5a, we view the market as a new buying opportunity and that belief strengthened during the first quarter. More than 50% of 3Q2021 and 4Q2021 respondents suggested that smart investors should be Net Buyers and this proportion jumped to 59% in 1Q2022. Meanwhile, the proportion that sees a Net Sellers market has persistently fallen from 30% during 2Q2021 to 12% during 1Q2022.

The suggestion to be a net buyer comes with the caution to reduce risk in one’s portfolio. From Figure 5b, the proportion of respondents recommending Reducing portfolio Risk made a quarterly jump from 24% to 41% while the proportion recommending Increasing Risk fell from 19% to 11%. Even the proportion suggesting Maintaining Risk fell from 57% to 49% adding to the Reducing Risk total. Combining the two Figure 5 results, we deduce that respondents see real estate as a relatively good investment opportunity at a time when all investors should be reducing risk exposure.

Figure 6 — Source: UF Bergstrom Real Estate Center

Since the beginning of our housing questions in 3Q2021, the single-family home market has been described as hot. 90% of respondents say that homebuilders are Selling Upon Completion or struggling to keep pace with a Hot Sales Market as we see in Figure 6. Each quarter the perspective has stepped slightly from Selling Upon Completion to Hot Sales Market to the point that during 1Q2022 76% of respondents were in the top category. Of course, this perspective was offered before the mortgage rate increase that occurred in late spring. Preliminary results from the second quarter survey indicate that these proportions will shift down from this peak but will remain a predominantly Hot Sales Market.

Figure 7 — Source: UF Bergstrom Real Estate Center

Very few of our survey participants report the Florida tenant demand as extremely high or extremely low. Most views are central as either Declining, Stable, or Increasing. Over the past year, responses for Disappearing or Exploding were very rare. Those suggesting that demand is Declining faded consistently over each of the past four quarters – as low as four percent for 1Q2022. The majority of respondents described tenant demand as either Stable or Increasing at a ratio of three to four during 2Q2021 and 3Q2021. The direction remained the same during 4Q2021 and 1Q2022, but the ratio increased to the level of two to seven as seen in Figure 7. Tenant demand across the state is viewed as increasingly positive but not quite extreme.

As we started 2022, the real estate market perspective was impressively strong across all markets. The industrial and apartment sectors are performing at peak levels while office and retail performance is a bit muted. The housing market has been simply roaring. Collectively, demand is strong and growing and capital, both equity and debt, are abundant.

We expect this bright outlook to dim slightly with the results of our second-quarter survey. Interest rates jumped up and recession concerns are being discussed. The early 2Q2022 submissions imply some softening. However, unless there are dramatic changes in the late submissions, results will continue to be positive. We will keep a close eye on the coming results to monitor the market’s transition from strong growth to more challenging times. It seems clear at this point that real estate will be a relatively good performer regardless of the overall absolute investment market.

Florida Consumer Sentiment

Figure 1 — Source: UF Bureau of Economic and Business Research

The Florida Consumer Sentiment Survey, conducted by the UF Bureau of Economic and Business Research (UF-BEBR), recorded a relatively low result for May 2022. The 569 Floridian respondents, comprised of 45% female, 25% non-white, 56% with income over $50,000, and 19% – 29% in each of four regions across the state, returned an overall index value of 61.5. Figure 1 shows the May value for each of the past five years, all compared to the lowest value on record from June 2008. The index range is from 2 to 150 with a typical score in the 90s.

A sentiment score in the 60s is uncommon and reflective of a weak perspective on the current and near-future of the economy. Since 1985, the BEBR overall sentiment index fell into the 60s only three times: the early 1990s, 2008 – 2011, and 2022. Given that this index is an emotional measure as opposed to an analytical measure, it may detect shocks more directly than absolute conditions. Thus, the absolute economic conditions today may not be as weak as they were during the Great Recession but the abrupt economic reaction to the pandemic is being reported as a shock equivalent to the credit crisis. In any event, we can hope that the index will recover from its currently very low point.

There are five components of the overall index that include current personal situation, personal one-year expectation, current national conditions, five-year national expectation, and belief that now is a good time for major purchases. Every one of these components presents a significantly declining sentiment since May 2021. The biggest drop in confidence came in the major purchase component.

For the overall index, as well as each component, results are stratified by different constituent groups. We can see results by gender, age, and income. Figure 2 shows the score for each group on the total sentiment index. Over the past year, every constituent’s sentiment fell materially. Not only did every group drop its total index score over the year but every group dropped its score for each of the five components. Such a consistent change across all categories by every constituent group is unusual.

The pandemic drove Florida’s sentiment index below one hundred, around which it oscillated for years prior to 2020. As the general economy recovered and employment expanded, the index remained around 80, failing to match the economy’s improvement. Since mid-2021 the index has drifted down to its current low point in May 2022. As we see in Figure 2, this result is very consistent across all constituents. Despite the national recovery and the fact that Florida has expanded to new highs over the past couple of years, Florida sentiment is consistently low in terms of current conditions and expectations for the future.

Figure 2 — Source: UF Bureau of Economic and Business Research

Of the constituent groups, the one aged 60 and over fell the most from May 2021 to May 2022. This group had a relatively low sentiment in 2021 but it fell by 31% from that low point over the year. Those in the under $50,000 income category had a low perspective in 2021 but fell the least of the groups over the year, dropping by 19%. All remaining groups delivered a sentiment that was down by a percentage in the 20s, generally from the low 80s to the low 60s.

Figure 3 — Source: UF Bureau of Economic and Business Research

Each of the five components offers very similar results. Figure 3 shows the Buy Major Items Now component with the largest change in values over the past year but its pattern is repeated across the other four segments. As in the constituent analysis of the overall index shown in Figure 2, the group of respondents aged 60 and over presents the most dramatic drop in sentiment over the past year. In May 2021, this group had a relatively high score of 83 in the Buy Major Items category. By May 2022, this group’s sentiment fell to 42, which is the lowest absolute number in the entire survey. This is a 49% fall in sentiment over the year.

In this same chart, we see that both the low- and high-income groups present the same current sentiment, around 51. However, these two groups changed by very different magnitudes over the past year. In 2021, the over $50,000 income group showed a relatively high sentiment score of 86 and the below $50,000 income group showed a relatively low sentiment score of 66. During the year, the over group dropped their score by 40% and the below group dropped their score by 23%, giving them very similar current results. In this chart and each of the other four categories, gender plays virtually no role in changing sentiment. As with every group, men and women both show a falling sentiment from May 2021 to May 2022 but they change by an almost identical magnitude. Hopefully, the coming months will produce some positive events for Floridians and their sentiment will start to recover.