Those who have bet that commercial real estate can only go up and never down might take a close look at the Trepp LifeComps portfolio report for Q1—and its cumulative negative return of 5.77% over 12 months.
“Asset classes in the LifeComps portfolio have been hit with a negative total return in Q1 2022,” the report stated. “Multifamily properties took the hardest hit, with a -5.33% total return realized in Q1. Retail and hotel property loans had a lower realized loss of -3.08% and -3.22% respectively. Continued volatility in global markets could impact investor-driven returns as certain parts of the global economy remain closed and drive further uncertainty as we progress into 2022.”
Industrial property investments have slowed—for example, Amazon reportedly will dump an estimated 10 million square feet of warehouse space. According to Trepp, additional funding and newly originated loans for industrial have fallen by half to $1.8 billion since the fourth quarter of 2021.
The LifeComps Commercial Mortgage Loan Index is a benchmark based on mortgage loan cash flow and performance data.
Pointing to Fed interest hikes, the report noted that a “rise in rates can impact real estate by making lending more expensive and pushing cap rates higher, signaling a possible slowdown in CRE investments.”
Given what might be called the new post-pandemic normal, at least for the time being, some category occupancy rates are a likely worry for investors. The lowest in the portfolio was for hotels at only 46%. Second worst was office at 89% occupancy. Nearly two-thirds of the loans in the portfolio are for office properties.
Even with negative returns, multifamily, as well as industrial, remain “strong investment choices among life insurance investors.”
The results parallel a hardening of sentiment in the industry. The CRE Finance Council (CREFC) found that overall sentiment among its board of governors took a nosedive for the first quarter of 2022. The current level, a score of 80.5, down from 105.2 in the last quarter of 2021, is the second lowest on record, with only the first quarter of 2020 registering worse. The change was “decidedly negative.”
Also, commercial real estate development association NAIOP found a downward shift in Q1. Its NAIOP CRE Sentiment Index is currently at 53. That’s down from 56 in the fourth quarter of 2021. Before the pandemic, the value was 57.