Industry sentiment hasn’t been this positive since last year, according to CREFC.
Commercial real estate predictions are taking a positive turn. In fact, sentiment has reached the highest level since the tail end of 2024, according to CREFC’s Sentiment Index Survey for the third quarter.
The Council’s index clocked in at 122.8 in September, marking a 9.3 percent increase compared to June. The figure aims to gauge shifts in market conditions and outlook, weighing in responses across nine different core questions.
With an 82 percent response rate, the questionnaire reached participants — senior executives that are part of CREFC — between Sept. 18 and 28.
As the recent government shutdown isn’t reflected in this survey, the overarching positive shift relies on factors such as the Fed’s rate cuts, leaving core capital markets open and functional, CREFC Managing Director Raj Aidasani told Commercial Property Executive.
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“We don’t see the shutdown changing lenders’ medium-term posture in a material way — it introduces noise rather than a new trend. The bigger story from our survey is that lower rate pressure and improving liquidity are bringing both borrowers and lenders back to the table,” he added.
The monetary shift is beneficial. However, government policies remain mercurial, uncertain and counterproductive, Ryan Severino, managing director & chief economist and head of research at BGO, told CPE.
Yet, the survey indicates a sanguine outlook on policy, with 57 percent of respondents considering it to be a tailwind over the next year. However, Severino pointed out that outlooks such as CREFC’s took swings across the past quarters, reflecting shifting market psychology rather than actual conditions.
Rates shine a light on commercial real estate’s future
The largest perception swing of the quarter was regarding the perceived impact of mortgage rates and cap rates on CRE performance. More than three-quarters of participants, or 78 percent, viewed it as positive in September, as opposed to just 38 percent in June.
Earlier surveys were entrenched in trade policy and inflation concerns, which made participants lean against the possibility of rate cuts, Severino posited. The latest questionnaire, being sent out at a time when risks shifted from inflation to the labor market, captured a brighter financial outlook, defined by the Fed’s rate cuts.
As a result, requests for debt are believed to increase across the board, with 95 percent of respondents forecasting higher borrower demand over the next year. However, this belief has mostly been positive in recent quarters, only dipping below the 50 percent threshold in March.
“The survey reveals a market that is both confident and selective. Yes, 95 percent expect financing demand to increase, but that capital is being channeled carefully — witness the flight to quality in office and the rise of data centers as a leading pick. Multifamily’s continued appeal, even amid pockets of stress, underscores just how nuanced this recovery will be,” Raj told CPE.
Bridge loans for lease-up or value-add plays, especially in multifamily and select retail or industrial properties, are expected to be in demand, Raj added. Acquisition notes for multifamily and data centers are similarly expected to tick up.
Lower rates and tighter spreads might also allow for the refinancing of maturing 2024-2026 loans to pencil out, he reasoned. Additionally, new issuance of SASB CMBS loans could witness an increase, despite rising delinquencies.
“It’s possible to have healthy new issuance and elevated delinquencies at the same time. Investors are rewarding today’s structures and sponsors, while legacy stress — especially in office — works through the system. We expect that bifurcation to narrow as workouts progress and the rate backdrop stabilizes,” Raj pointed out.
Fundamentals still have room for improvement
The prospects of CRE fundamentals are looking up, with 46 percent of participants believing improvements are due. Over the past two years, the figure went past the 50 percent mark just once, in the fourth quarter of 2024, mostly hovering in the late teens and mid-twenties.
While on the mend, fundamentals are not out of the woods yet. Lenders ought to practice underwriting discipline, expecting lower loan-to-value ratios, as well as higher debt yields, Raj told CPE. Higher borrower and structure scrutiny, including tenant improvements, leasing commissions and capital expenditures, is also called for.
Lenders may also lean heavier on asset types with clearer cash flows, potentially favoring multifamily and needs-based retail, while retaining a deeper dissection for office and older buildings with thinner reserves.
Notably, the survey also captured an upswing in the appetite for retail, with the segment in the third spot for the best risk-adjusted investment opportunity. That placed retail behind multifamily and data centers, but ahead of industrial and office. Severino wasn’t surprised by the retail sector’s resurgence.
“I have been a contrarian and a large fan of retail for decades. Yes, the industry had some housekeeping to do, but it seems like the perception of the property sector lagged reality for years,” he mentioned.
“Now it seems market participants are catching up. I still like retail, but it does pose some challenges for investors. Yet, in a world of structurally lower interest rates and cap rates, retail could play a larger role in diversified portfolios, both as a risk reduction play but also as an income play because of the strong cash flows and income the sector produces,” he concluded.
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