CREFC has surveyed some of its attendees—all major participants in the commercial real estate finance industry—at the 2017 CRE Finance Council January Conference in Miami. CREFC’s 2017 market outlook survey confirmed what we observed at the conference this year, that for the most part survey respondents were cautiously optimistic in the face of the Trump Administration, Risk Retention and movement near the peak of the real estate cycle. We decided to dig a little deeper to see how this year’s survey responses differed from last year’s. Armed with the benefit of a little hindsight, let’s consider the year we had, the year we expected, and the year we’ve just begun.
Overall U.S. Economy
We start with a marked increase in the industry’s overall outlook on the U.S. economy: last year a super majority (about 67%) of survey respondents expected the economy to perform the same or worse than the year before. Respondents hit the mark; last year real GDP in the U.S. increased 1.6%, which was a deceleration from the prior year’s 2.6% growth. This year only a third of respondents (about 33%) said they think the economy will do the same or worse as last year. A super majority of respondents (about 67%) expect our economy to improve in 2017, with a few even expecting to do “much better.”
When the survey topic turned to interest rates, most respondents (about 80%) told CREFC that they expect increases of 25-100 basis points, which would be in line with the Fed’s projection of three increases of a quarter-percentage-point each this year, the first of which occurred March 15. A few survey respondents (about 11%) expect interest rates to be about the same by the end of this year with rate increases of 25 basis points or less; last year twice that amount (22%) expected rate increases of less than 25 basis points, while the majority (about 70%) expected rates to inch higher by about 25-50 basis points. Again, the majority of CREFC respondents got it right in 2016; the Fed did increase its key short-term interest rate by a quarter of a percentage point last year, but the hike didn’t happen until mid-December.
This year’s survey added questions about real estate cycles that were not included in the 2016 survey. Most respondents (about 55%) believe we are at the peak of the current real estate cycle, especially in the hotel and multifamily sectors. This year respondents specifically expressed concern about oversupply in the multifamily market, which concern was certainly present last year but seems to have increased as rent growth slows following the past few years’ multifamily construction boom. Sentiment is much more positive toward the retail, office and industrial sectors, which many (around 50%) believe are in the middle of their real estate cycles.
One of the biggest shifts this year was in expectations for construction activity: last year only a small minority (about 7%) expected a decrease in construction activity, while this year almost half (about 48%) expect a decrease. This year’s predictions follow 2016’s meager 1% increase in new constructions starts. A large majority (about 61%) of respondents expect banks’ balance sheet construction loan volume to decrease. The outlook is slightly less pessimistic for life insurance balance sheet lenders, for whom only a quarter (about 26%) of survey respondents expect a decrease in construction lending.
One area where survey participants missed the mark in 2016 was CMBS issuance. The 2016 survey participants expected CMBS issuance between $100 billion and $150 billion but actual issuance was around $63 billion. Market participants seem to have tempered their expectations this year. For example, in 2016 only 17% expected to see less than $100 billion of CMBS and none predicted any less than $75 billion; this year only 13% expect any more than $100 billion in issuance. This year, the largest cohort of survey respondents (around 45%) expect CMBS issuance to fall in the range of $75 -100 billion this year, with another nearly-as-large group (around 39%) expecting CMBS issuance to land somewhere between $50 billion and $75 billion.
What’s It All Mean?
What’s it mean? Well, not really much, right? As Yogi Berra said, “It’s tough to make predictions, particularly about the future.” Look, we all have a bias in favor of the straight line projection and we all have a bias against change. Where we are is pretty comfy and please, let it stay that way for a few more years, right? No one wants to see black swans out there (or orange swans, as the case may be).
Maybe we’re right this time and we nailed these predictions. Wouldn’t that be nice? The world will go on turning for another year, the economy will continue to grow, albeit gently, our business will continue to grind along in a sort of middling trailer trash Goldilocks sort of way. That’s not bad. It would be nice if there were more CMBS done. It would be nice if the Trump bunker would stop tweeting and would get on with tax reform and regulatory rollback. But if the answer is another year of government gridlock and no black swans, and 2% growth like the last few years, that’d be okay too. I’m not sure I’m betting on a quiet year, but I am certainly hoping for one.