Graphs and Observations

Download the Spring 2017 NAIOP Sentiment Index Report. 

Employment

1. How likely is it that your company will add employees within the next 12 months?

Employment

Expectations regarding employment growth over the next 12 months increased by 5.00 percent since the last survey in September 2016, reversing a steadily decreasing trend since the survey’s inception in February 2015. The score for this question is highly positive (2.15), indicating that survey respondents expect to add more jobs over the next year than they thought they would over the prior 18 months.

Occupancy Rates

2. Based on your own projects, where do you believe occupancy rates will be in 12 months?

Occupancy Rates

The 1.48 score for occupancy was a significantly positive change compared to the prior three surveys, and its level is nearly as high as it was for the first survey conducted in February 2015. The 5.30 percent increase (the highest among all questions in the current survey) reversed a three-survey trend that started with the second survey in September 2015. Based on this survey’s responses, occupancy rates are expected to show strong growth over the next year.

Direct from the Survey Participants

“A mixed bag; retail will be [the worst] (the ‘Amazon’ effect) while office and industrial will [improve]. Online sales are creating a seismic shift and uncertainty, both for retailers as well as the cities and towns that host their facilities and are losing a ratable base, tax revenue and jobs.”

Face Rents

3. Based on your own projects, where do you believe face rents will be in 12 months?

Face Rents

Like occupancy rates, the 1.53 face rent score represents a solid rebound from the steady downward trend of the prior three surveys. This score denotes a 2.00 percent increase in survey respondents’ expectations and was a major contributor to the positive reading of the Index. Overall, face rents are expected to remain positive and improve in 2017.

Effective Rents

4. Based on your own projects, where do you believe effective rates will be in 12 months?

Effective Rents

The effective rents score increased 1.70 percent after declining 4.20 and 2.00 percent in the prior two surveys. As such, effective rents are expected to rise somewhat over the next year. Effective rents and face rents are expected to converge and start growing at similar rates, possibly indicating that operating expenses and/or concessions are expected to stabilize over the coming 12 months.

Direct from the Survey Participants

“In my region, things seem to be improving, though materials and labor costs are going up as construction companies are getting busier.”

Construction Materials Costs

5. For projects on which you are seeking bids, where do you believe the cost of construction materials will be in 12 months?

Construction Materials Costs

There was less optimism about materials costs in this survey than in the prior two surveys with a 2.70 percent decrease in the score for this survey question. The score became more negative, going from -1.68 to -1.95. This decrease indicates that respondents expect the cost of construction materials to be slightly higher in the next year. This negative score reflects respondents’ belief that the cost of construction materials is expected to continue rising in the next year.

Construction Labor Costs

6. For projects on which you are seeking bids, where do you believe the cost of construction labor will be in 12 months?

Construction Labor Costs

The score for construction labor costs, -2.08, is about 3.00 percent “greater” than the score reported in the September 2016 survey. It is now nearly as “high” as ever recorded in this Index (it was -2.13 in September 2015). This large negative score indicates that respondents expect construction costs to rise over the next year at a higher rate than in 2016.

Direct from the Survey Participants

“As long as the equity and capital markets stay as strong as they are, I think any downturn we experience in the markets will be able to be offset and controlled.”

Available Equity

7. For projects you will be financing/refinancing, how plentiful do you believe equity will be in 12 months?

Available Equity

The score for construction labor costs, -2.08, is about 3.00 percent “greater” than the score reported in the September 2016 survey. It is now nearly as “high” as ever recorded in this Index (it was -2.13 in September 2015). This large negative score indicates that respondents expect construction costs to rise over the next year at a higher rate than in 2016.

Available Debt

8. For projects you will be financing/refinancing, how plentiful do you believe debt will be in 12 months?

Available Debt

Like equity, the Index figure regarding available debt declined slightly (by 1.20 percent), continuing a consistent decline since February 2015. Like equity, debt capital is expected to be available, but at higher costs, which is consistent with recent increases in interest rates by the U.S. Federal Reserve.

Direct from the Survey Participants

“The economy is incrementally better, but still feels fragile.”

First-Year Capitalization Rates

9. Where do you expect first-year cap rates to be for deals you will close 12 months from now?

First Year Cap Rates

Survey responses indicate that first-year cap rates are expected to increase in the coming year. The March 2016 score for this question was -0.50; the September 2016 score was less negative (with a score of -0.38), resulting in a 1.20 percent positive change; however, the current survey score dropped significantly to -0.83, a negative six month change of 4.50 percent. This result indicates that respondents anticipate an increase in project risk, an increase in interest rates or, most likely, both over the next year.

General Sentiment

10. What is your general sentiment regarding conditions in the commercial real estate industry; as a commercial real estate professional, how do you see the industry in 12 months?

General Sentiment

The general sentiment score — much like the scores for employment growth, occupancy rates and both face and effective rents — posted a highly positive response in this survey. The 0.65 score for this question is 3.20 percent greater than the reading six months ago, and is the highest it has been since September 2015. This is a good sign for the CRE market in that survey respondents expect a positive commercial real estate climate over the next 12 months.

Direct from the Survey Participants

“I am comfortable with a strong market over the next 12 months, however I believe we will be facing a much more difficult economy 12-24 months from now. The market exuberance about [President] Trump will fade, interest rates [will] begin to rise, the implications of overbuilding multifamily product will kick in, and the cyclical economy will begin a downward turn.”