The NAIOP CRE Sentiment Index
Release Date: Fall 2019
Download the Fall 2019 NAIOP CRE Sentiment Index Report.
About The NAIOP CRE Sentiment Index
The NAIOP Sentiment Index is designed to predict general conditions in the commercial real estate industry over the next 12 months. The forecast is not based on an analysis of historical data, but rather it represents a look into the future by real estate developers, investors, operators and brokers. These NAIOP members are asked to respond to questions based on their ongoing work, including projects in their pipelines. For more information, see Understanding the Index.
The NAIOP CRE Sentiment Index for September 2019 is above 50, indicating that the commercial real estate market should continue steady, sustainable growth over the next 12 months, and overall commercial real estate development conditions should improve slightly through at least the end of 2020. Respondents predict increases in occupancy rates, face and effective rents during the next year, along with steadily available equity and debt financing for projects in their pipelines. A majority plan to hire employees, even though the costs of construction materials and labor continue to cause concern. Also, for the first time, respondents expect first-year cap rates to be lower (associated with higher value) 12 months from now. The index has remained between 55 and 57 for the past four years, a sign that the commercial real estate market is not currently overheated and should experience continued expansion over the next year. However, it is interesting to note that while the scores for the first nine questions, which relate to respondents’ businesses, generally increased, the scores for the tenth question on general sentiment continued to decrease. The low score, which is not included in the calculation of the index, may be related to overall economic and political uncertainty in the U.S. and abroad despite favorable conditions within the respondents’ markets.
Notable Changes From the March 2019 Survey
NAIOP has converted the overall index from a decimal to a whole number, and it is now on a 100-point scale (similar to the Purchasing Managers’ Index). A rating above 50 indicates favorable sentiment, while a rating below 50 indicates unfavorable sentiment over the next 12 months. The methodology and scale of the 10 survey question responses remained the same.
The two most positive changes in the survey that helped keep the index above zero were improvements in first-year capitalization rates and effective rents. Over the coming year, respondents expect lower first-year cap rates, which is a 5.0% improvement compared to six months ago. Additionally — and for the first time since the survey began — the responses swung this question from “higher” in the next 12 months to “lower” in the next 12 months. Lower expected future cap rates and associated higher prices, along with the 0.8% improvement in the respondents’ expectation for stronger effective rents, helped to keep the overall index above 50. Face rents may also yield positive contributions to real estate development in the next 12 months (an improvement of 0.8%) as projects are completed. Expectations for adding employees in CRE firms within the next 12 months fell slightly.
Despite these mostly positive views for the near-term future, the respondents’ overall sentiment about the commercial real estate industry declined. This is perplexing given respondents’ generally favorable outlook for the individual components that make up the Sentiment Index score. These apparently contradictory responses may be a sign of the times — a strong economy, low interest rates and low unemployment combined with the headwinds of a late real estate cycle, uncertain trade policy, slowing growth in China and Europe, and an upcoming U.S. presidential election.
Agreement/Disagreement Among Respondents
The most consistent responses (meaning there was the most agreement among survey participants) were related to questions about project face rents, occupancy and first-year capitalization rates. More consistent and favorable expectations for face rents and first-year capitalization rates contributed significantly to the index’s improvement from the March 2019 survey. Respondent expectations for the future availability of capital (both debt and equity), and improved views regarding the future cost of construction materials and labor, also helped raise the index.
The questions with the least consistent responses (most dispersion) regarded employment (within CRE firms and from contractor labor) and construction materials costs. The three questions were about 20% less consistent than expected, meaning that not all respondents believe these components of the development process are equal across the U.S.
The data is compiled and analyzed by Thomas Hamilton, Ph.D., MAI, CRE, and Gerald Fogelson Distinguished Chair in Real Estate at Roosevelt University in Chicago. The survey questions and statistical methodology were created, refined and finalized between 2014 and 2016 by the NAIOP Distinguished Fellows listed on the online NAIOP Sentiment Index.
Read more about Distinguished Fellows