Partly Cloudy: Outlook of Real Estate Industry Leaders
Surveyed real estate industry leaders saw the skies turn gray in the most recent quarter, a period marked by rising interest rates, increasing costs and a slowing economy.
The third quarter of 2022 marked the third consecutive period that the Bergstrom Real Estate Outlook Index showed a decline, and it’s the lowest rating since October 2020, when the survey was launched in its current form.
To be sure, the outlook of the respondents was still positive in the third quarter — barely — with 71% rating the real estate market as stable, 18% as strong and 14% as weak. That left the index at 3.6 on a scale in which 0 is neither positive nor negative. But the measure was down from 17.2 in the first quarter and the lowest since -2.2 in the fourth quarter of 2020. (Figure 1)
Figure 1 — Source: UF Bergstrom Real Estate Center
Assessing the overall real estate market, one survey respondent wrote that “when the cost of your capital stack increases and the cost of your construction materials increase and the spread between your ROC [return on capital] and exit cap decreases, there is inherently more underlying risk associated with the development model. That’s where we are today.”
Another wrote: “Construction costs, inflation, interest rates, war [and the] declining stock market are all concerns.”
Conducted quarterly by the University of Florida Kelley A. Bergstrom Real Estate Center, the online survey gauges the perspectives of the center’s board of advisors. The 165 members are asked to rate their overall outlook on a scale as “very strong,” “strong,” “stable,” “weak” or “very weak.” While most of the respondents focus on the Florida real estate market, others operate in various locations in the Southeast and nationwide.
Housing sector less positive
The best sector for new investments remains the multifamily market for the fourth consecutive quarter, according to respondents, followed by industrial, retail and office. (Figure 2) “Multifamily rents continue to match inflation or better,” one respondent commented. Another said: “Our business is multifamily. Fundamentals are very strong.
Figure 2 — Source: UF Bergstrom Real Estate Center
Most respondents ranked the outlook for single-family homes as stable (51%), while 25% said it was strong or very strong and 24% said it was weak. To the question of how home builders are doing, more than one-third said they were “selling upon completion” (37%). This was followed by “trying to sell excess inventory (19%), “building inventory for future sale” (17%), “waiting for an opportunity to build” (16%) and “building rapidly to chase a hot sales market” (11%). (Figures 3 and 4)
Figure 3 — Source: UF Bergstrom Real Estate Center
Figure 4 — Source: UF Bergstrom Real Estate Center
Far and away the most challenging issue facing the housing market is rising mortgage rates (72%). A shortage of materials, which has plagued the market for well more than a year, was the next big challenge (13%) but this measure fell from 30% the previous quarter. Trailing in the most recent quarter were labor shortages (10%) and obtaining building approvals (5%). (Figure 5)
At a time of steeply rising rents and lack of housing supply, one respondent said affordability was a challenge facing the housing market. “Housing affordability needs to be addressed. We need more housing, and we need [the] government to provide vouchers to help people who cannot afford it.”
Figure 5 — Source: UF Bergstrom Real Estate Center
One multifamily operator said he was distressed by the increased discussion among local governmental officials and tenants in Florida to implement rent controls, which he indicated would not solve the affordability problem in the long run. We “need to provide some scientific research/facts on rent control to the community. Politicians are abandoning science and trying to legislate in ways that have been proven to hurt [the] poor and middle class.” (For more on the issue of rent control, see our related story in this issue.)
Office doldrums
Two-thirds of the respondents said the office sector continued as the poorest one for new investments, followed by retail (17%), multifamily (8%) and industrial (7%). (Figure 6) Perhaps reflecting reduced demand because more employees are working remotely, the office sector has been the weakest of the sectors since October 2021. It’s “unknown the long-term impact of work from home,” one respondent commented in May. Class A office buildings with a lot of amenities are “very strong. Suburban very weak.”
Yet across the commercial real estate sector, tenant demand continued to be positive, with 84% of the respondents ranking it as stable or increasing, while 14% responded it was declining.
Figure 6 — Source: UF Bergstrom Real Estate Center
Business and hiring
Most respondents said they expect to add to their staffs in the coming year, but new hiring will slow. One-third said they expect to hire fewer employees this year than last year, while most plan to stand pat (53%), and others look to hire more (14%). (Figure 7)
Forty-two percent are forecasting that they will do less business in the coming year, while roughly one-quarter expect to do the same amount. The remainder expect to do more business (25%) or much more business (6%). (Figure 8)
Figure 7 — Source: UF Bergstrom Real Estate Center
Figure 8 — Source: UF Bergstrom Real Estate Center
Risk and financing
The availability of funding has tightened considerably in recent quarters. Forty-six percent of respondents said debt capital was “limited” and 6% said it was “very tight.” That contrasts with October 2021 when 61% answered debt capital availability was growing or extensive. Respondents said equity availability also dropped, with 23% saying it was growing or extensive, while 61% said it was holding steady and 16% said it was limited. In October 2021, 82% of those surveyed said equity capital was growing or extensive. (Figures 9 and 10) Far more “smart investors” are reducing risk in their portfolios (41%) than increasing risk (4%), according to respondents.
Figure 9 — Source: UF Bergstrom Real Estate Center
Figure 10 — Source: UF Bergstrom Real Estate Center
Taken together, real estate pros surveyed by the Bergstrom Real Estate Center see increasing clouds on the horizon. But the sky isn’t falling by any means, particularly in Florida where the real estate market continues to benefit from the state’s growing population. As one respondent said: “Florida in migration is the difference in our resiliency.”