Graphs and Observations

Download the Fall 2019 NAIOP Sentiment Index Report. 

Employment

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

Employment

Employment growth expectations are expected to decline a small amount at CRE companies during the next year. Responses to this question have consistently ranked as the most positive market indicator in the survey; however, the current survey responses were widely dispersed indicating disagreement among respondents. As such, in this survey, the employment question contributes less weight to the overall Sentiment Index. Even so, the overall employment outlook remains positive, indicating that survey respondents expect they are likely to continue adding more jobs going into 2020 signaling continued growth in the commercial real estate development market.

Occupancy Rates

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

Occupancy Rates

The occupancy rate score (0.68) increased 0.5% compared to March 2019, and it had slightly less-than-typical dispersion among survey respondents. This positive score means there is greater-than-average certainty among respondents that occupancy rates could increase over the next 12 months. However, the slight increase still did not get the response back to the September 2018 level, when the occupancy rate score was 0.95. This continued lower expectation level might indicate that demand will continue to grow but at a tempered pace over the next 12 months.

Direct from the Survey Participants

"Recession worries loom based on geopolitical issues, Fed movements and the pending presidential election. We are seeing lenders getting more conservative and prospective tenants moving more slowly to lease and/or wanting shorter-term deals (more flexibility for them if/when the economy slows)."

Face Rents

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

Face Rents

Responses relating to face rents have stayed relatively stable and highly positive since March 2016. For the past two years, this question featured the least dispersion among the responses, indicating significant agreement among survey participants regarding face rents increasing into the next year. This survey question, along with effective rents, employment levels, and both equity and debt capital availability, has helped keep the overall index positive over the past 48 months. Overall, face rents are expected to remain positive and improve between now and the end of 2020.

Effective Rents

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

Effective Rents

Expectations regarding effective rents (score of 1.15) increased 0.80% compared to the March 2019 survey. This indicates that expectations have moved back to longer-term norms, meaning effective rents are expected to continue to rise at a modest rate over the next year. With readings for face and effective rents remaining in solidly positive territory, it appears that respondents anticipate that property rental income should grow modestly over the next year.


Direct from the Survey Participants

"I foresee a stabilization or small dip in the market in the next 12 months. Once the global trade issues are resolved and the election is decided ... we'll see."

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

As with every survey result going back to its inception, construction materials costs (score of -2.10) provided significant downward pressure on the overall Sentiment Index. Compared to the two most recent surveys, the score for construction materials improved by 0.30% since March 2019 and is up a solid 3.50% over the prior 12 months. Lower-than-typical consistency of responses to this question indicates that expectations of rising costs are neither uniform across the country nor across product types, and negative perceptions remain high. Survey respondents see the cost of construction materials rising over the next year but at a slower pace than the prior four surveys.

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 (-2.13) is slightly more positive in this survey compared to a year ago (3.50% improvement). It is the same level as March 2019. Along with construction materials, these two items remain the most negative components of the overall Sentiment Index. Survey responses were more inconsistent (more dispersed) than those relating to construction materials costs; however, given the large negative score for this question, respondents expect construction labor costs to keep rising over the next year, although less rapidly than in previous surveys.

Direct from the Survey Participants

"Commercial real estate development remains stable to robust in key geographies and property types. The principal economic drivers will be land and construction costs. All elements of hard construction are rising and lead times are growing, which potentially increases the interest cost of the project."

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 available equity (1.65) continued its steady rebound in this survey. Since hitting a low point in March 2017, the available equity score has increased 6.20%. The available equity measure contributes to keeping the overall Sentiment Index’s score above 50. Respondents remain optimistic about the continued availability of equity capital through the end of 2020.

Available Debt

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

Available Debt

The question regarding available debt (score of 1.65) continues to rise since the March 2017 survey, registering highly consistent responses from survey participants. This is a reversal of the consistent and sharp decline that existed between March 2016 and March 2017. Responses for this question were consistently positive across survey participants. Like equity, debt capital should be available at favorable rates over the next 12 months.

Direct from the Survey Participants

"I see a slight recession, which will bring with it lower labor/materials costs, lower occupancy and lower/equal face rate/effective rate. Equity and debt will be available for well-established firms, though it will certainly not be ‘plentiful‘ and will be very diligently underwritten."

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 (score of 0.05) will probably decrease slightly in the coming year. This survey’s score improved by about 5.50% over the past year and 5.00% since March 2019. This question’s score had been negative since the inception of the survey in March 2016, so the move into positive territory is significant. The change in response direction may align with lower interest rates. Response volatility for this question is now lower than prior surveys; this would indicate that survey participants are more bullish in their responses. Therefore, respondents believe cap rates will fall over the next 12 months..

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 survey’s final question about overall sentiment regarding future conditions is designed to serve as a verification of the Sentiment Index and is not included in the calculation of the index. The general sentiment positive score in this survey (0.28) fell by 0.5% compared to the reading taken in March 2019. This score is perplexing; nearly every individual question in this survey improved compared to responses gathered in March 2019, and results were similar to the September 2018 survey. Additionally, the September 2019 score for this question is the lowest ever recorded, which is also concerning. Although this question’s score is low, it is in positive territory, which means there still is a slightly optimistic view of the real estate development market over the next 12 months.

Direct from the Survey Participants

"It's been a wild few weeks with rates and forecasts lowering. We will see how 2020 starts and how the impending election affects the market."