The outlook for the commercial real estate market weakened in the third quarter, but the news wasn’t all bad. Surveyed Bergstrom Real Estate Center advisory board members reported a few bright spots in an otherwise gloomy outlook as the market faced headwinds from increased interest rates and a tightened market for debt and equity capital.

For the first time, more than 40% of respondents described the overall market outlook as “weak,” and just over half labeled it “stable,” leaving less than 10% split between “very weak” and “strong” (Figure 1). The outlook was the weakest since we launched the survey in 2021. The result contrasted with the past few quarters, when the general assessment was that the overall market was gradually stabilizing.

Conducted quarterly by the University of Florida Kelley A. Bergstrom Real Estate Center, the survey gauges the views of the center’s 160 advisory board members, who participate in virtually all facets of the real estate industry.

In contrast to the overall outlook, the housing market is a different story. Since the fourth quarter of 2022, respondents have gradually grown in confidence about housing. Respondents answering that the residential market was “strong” increased to 33% from 8% in the first quarter, while “weak” responses fell to 18% from 44% (Figure 2). “Across single-family homes, the lack of inventory will continue to provide tailwinds,” one board member commented.

Changes in capital availability — following the ratcheting up of interest rates by the Fed starting in 2022 — was a drag on both the commercial and residential housing markets. Perhaps this affected the commercial market more than housing because government-sponsored enterprises like Fannie Mae and Freddie Mac provide capital to the residential mortgage market. In any event, respondents reported equity and debt capital were both limited (Figures 3A and 3B).

Respondents described equity capital as mostly “limited” to “stable,” which has been consistent over the past year. However, this is the first quarter the “very tight” responses topped 10% at 14%. The debt market appeared far more challenging. Roughly half of the respondents said debt as “limited” and 36% as “very tight” — meaning more than 87% view the debt market as less than stable.

Despite the capital concerns and an overall weakened outlook, the percentage of respondents who expect “more” business in the year ahead has steadily risen the past few quarters, while the “less” business responses fell below 50% for the first time in a year. Even in the face of weakened market conditions, this indicates respondents were navigating their way to greater confidence in business opportunities.

The debate continued over whether the industrial or multifamily sector provided the best investment opportunity. The sector took the lead several quarters ago when apartment rents soared throughout Florida. That’s not to say everyone didn’t still love the relatively healthy industrial sector, but multifamily was too hot. Now the apartment fever appears to have broken as industrial edged multifamily 39% to 37% as the sector viewed as having the best investment opportunities (Figure 4). Don’t overlook the retail sector, which seemed to have found some solid ground after years of concern — 16% of respondents said retail offered the best opportunity. There was no debate over the sector facing the most challenges: office buildings. The office market received more than 80% of the “poorest opportunity” responses for the second straight quarter.

Another glimmer of hope found in the most recent survey was a subtle shift among “sellers,” “holders” and “buyers.” For the first time in a year, no respondent suggested that investors should be “net sellers.” At the same time, the “net buyers” response rose above 50% for the first time in a year (Figure 5A). Perhaps respondents believe pricing is starting to reflect recent struggles, and this weakness will present new opportunities. Few respondents reported they were ready to start “increasing risk” but there was a continuing move from “reducing risk” to “maintaining risk,” with more than 50% of respondents holding steady on taking risks (Figure 5B).

Overall, survey responses reveal a concerned and focused group of investors. Many respondents described the environment as weak, with very limited equity and debt capital. But there appears more confidence in recent quarters, and a better understanding of current pricing. In the coming quarters, perhaps the clouds will lift, and we’ll enter a period of more capital availability and softening interest rates. Or perhaps the ableist investors will push away clouds by expanding activity and taking what the market has to offer.

“Stay alive until ‘25,” one respondent advised. “Things will steadily strengthen as we get to 2024.”