Over the past three years real estate professionals have ridden ups and downs through the COVID-19 pandemic, a period of fantastically low debt rates and a responding spike in interest rates that cooled the overheating economy. Going into 2024 it seems investors were left with two ways of viewing economic conditions: either “this is the new normal” or “any day, rates will drop again, and we will be off and running.”

Given this backdrop, it is interesting to see the running perspective of Bergstrom Center advisory board members, specifically when asked to assess the availability of capital on scale from “very tight” (0) to “extensive” (5). They were reserved in their view of equity capital — the average response fell from 3.2 in early 2022 to 1.5 by yearend (Figure 1A). The survey results showed no recovery in 2023, with quarterly responses drifting from 1.7 to 1.4.

 

This looks rather weak until you examine debt availability, which followed the same pattern but at a lower level (Figure 1B). Even during the first quarter 2022, prior to the beginning of Fed Fund rate hikes, the respondents anticipated limitations on debt. As this played out over the past eight quarters, the debt score fell below 1 for four consecutive quarters before peeking just above 1 in the fourth quarter 2023. Clearly, equity and debt capital are both scarce.

 

These results set the tone for the latest outlook survey, which the University of Florida Kelley A. Bergstrom Real Estate Center has conducted since 2021 to gauge the views of the center’s advisory board members.

For the second straight quarter, more than 40% of respondents described the overall market outlook as “weak.” The index charted in Figure 2 shows respondents’ perspective on the overall commercial outlook on a scale from -100 to 100 where zero is neutral. After peaking in the fourth quarter of 2021 at more than 85, the quarterly index fell to -37.5 in the fourth quarter, its lowest result since the survey’s inception. It seems that limited capital and pricing uncertainty have left investors with more concerns than prospects.

 

The single-family housing outlook followed the same downward trajectory during 2022 but rebounded a bit in 2023, also seen in Figure 2. Quarters 2, 3, and 4 of 2023 report slightly positive housing index values between 6 and 18. Respondents viewed both commercial and housing markets as close to neutral with commercial a little below and residential a little above. Settling inflation and interest rates along with some price discovery could lead to some strengthening in both sectors over the coming year.

Risk-taking on hold

Respondents’ view on risk-taking is interesting. During the fourth quarter 2023, most respondents recommended investors be net buyers of assets over the coming year (Figure 3). A close second was investors should hold their positions, presumably in hopes of improving market conditions. Only 3% of the board members think investors should exit positions in the current environment. For risk level, most believe investors should either maintain their existing risk position in their portfolios or reduce risk (Figure 4). However, 14% suggested that this may be the time to increase risk, perhaps by taking advantage during this time of limited information.

 

Perhaps the most surprising response in the fourth quarter survey came to the question of which sector represents the best investment opportunity. Retail and industrial sectors were tied at the top, barely ahead of the multifamily sector (Figure 5). This virtual dead heat returned the industrial sector to a top perch it had held in 2021. Back then, the retail sector was the laggard, but it was soon replaced by the office sector when the post-COVID trauma set in. During the past several quarters, the office sector barely raised a single vote for best sector and recently received more than 80% of the vote for weakest sector. However, in the fourth quarter office received 10% of the vote for best sector, giving this quarter the most evenly divided response to the best sector question.

Taking stock going into 2024

For the past year participants in the commercial real estate market have had sinking expectations, and the housing market has sputtered to only slightly above neutral at a time when both equity and debt capital were limited. So, what is the collective view of this year’s business prospects? The answer: They are improving.

Figure 6 displays responses to the question, “Do you expect to do more or less business in coming year?” The results leave no doubt that business expectations improved over the year. In the first three quarters, “less” was the predominant response at 61% of all responses for Q1. But in the most recent quarter, despite a weakening outlook and growing capital concerns, “more” business in the coming year was the most common response. Perhaps this is because of the weakness in 2023 or there’s confidence the market is ready to settle down. Either way, it is encouraging to see an improving business outlook – and hopefully it’s a harbinger for 2024.