Market Confidence Grows for End-of-Year Recovery

Market confidence for a swift recovery is growing. According to the May 2020 LightBox Market Confidence Index, 47% of all respondents expect a fourth quarter or early 2021 recovery. At an early survey in April, only 36% of respondents expected a recovery by the end of the year or early 2021, showing a marked improvement.

“The sentiments of real estate professionals across the U.S. are improving, but are still extremely cautious,” Dianne Crocker, principal analyst with LightBox, tells GlobeSt.com.  The LightBox Market Confidence Index in June continued to reflect the market’s transition away from the widespread worsening of conditions in April to a market making its way down the path to recovery.”

The sentiment has changed since April, which many are now seeing as the depths of the pandemic. “The most dramatic change in respondents’ sentiments in June was a collective sense that commercial real estate hit bottom in April and is now largely “stabilizing” or “improving.” As employees venture back into offices, a growing number of stakeholders are beginning to re-initiate property deals that were stalled during the market shutdown, but the pace of recovery is slow,” says Crocker. “Concerns about rising COVID-19 infections in many states over the past month is injecting uncertainty into the market forecast and could drive down July readings.”

Investor confidence plays a significant role in investment activity, which can play a role in economic recovery. “Robust commercial real estate investment activity is dependent on the confidence of investors,” says Crocker. “Anyone looking to invest in new property deals needs to have a sense that they will get a return on that investment down the road. This means they are making judgments on several factors: Will the property’s price rise enough to generate a profit on resale down the road? Will this building attract enough tenants to cover operating costs? Is this area growing and attractive to businesses?  When a market shock hits—whether it’s a financial shock like we saw at the start of the Great Financial Recession or a health crisis like the COVID-19 pandemic, confidence declines and investors take to the sidelines, adopting a wait-and-see stance until the dust settles and more clarity emerges on the forecast for prices, employment, vacancy rates and so on.”

While the survey covered the national market, the pandemic and the economic fallout has had a varied impact across the country. “There is wide disparity in how the pandemic is impacting various metros, as well as different asset classes. Thus, the rate at which individual metros will recover is a function of the rate of COVID-19 severity there,” says Crocker. “Areas with low infection rates will likely see demand for commercial real estate bounce back more quickly than in other areas, like New York City, that were hit harder. As recovery begins to take hold, investors put industrial/warehouse/distribution at the top of the list of asset classes getting attention, followed by multifamily and vacant land.”

While investor confidence is growing, there are still question marks ahead that could and will impact the recovery.  “As we move past the midyear mark, the percentage of respondents forecasting a return to pre-pandemic levels in the fourth quarter of 2020 or later increased from 47% to 55%, likely reflective of the significant unknowns related to a possible second wave of the pandemic necessitating another contraction in economic activity, whether federal stimulus will continue (and at what level), the extent of unemployment, the pace of recovery in property markets and other factors,” says Crocker. “The next few months will be very telling as some respondents expect to see foreclosures begin to increase as tenants have difficulty filling vacancies and paying rents the longer unemployment continues. Investors are wading slowly back into the water as they carefully evaluate whether it’s safe to do deals again, but there is a great deal of uncertainty and a lower tolerance for risk than we saw in the first quarter.”