Graphs and Observations
Download the Fall 2020 NAIOP Sentiment Index Report.
Notable Changes from the March 2020 Survey
Figure 3 compares respondent expectations in late August/early September 2020 for the individual components that comprise the NAIOP CRE Sentiment Index to expectations in past surveys. Values above 50 represent expectations that a condition will be more favorable for development in 12 months (e.g., higher face rents, lower construction labor costs or lower cap rates). Values below 50 represent expectations that a condition will be less favorable during the next 12 months.
As noted in the key findings, respondent predictions for individual conditions measured in the index differed from March, but they remain generally pessimistic, with a negative outlook for every condition except for the availability of debt and equity. Respondent expectations for employment in their own firms, occupancy rates and rents are lower than in March and substantially lower than in earlier surveys. As noted in March, less pessimistic expectations for construction costs may reflect a belief that demand for construction inputs will be lower than in previous years due to reduced development activity.
Levels of agreement/disagreement between respondents are similar to those observed in March. Variation in the range of answers that respondents provided for most survey questions remains substantially higher than in surveys before March 2020, suggesting continued uncertainty about future conditions. Lower-than-usual levels of agreement between respondents may suggest that the CRE Sentiment Index for September is less predictive of future market conditions than surveys from previous years.
Some of the variation in the survey results may also reflect differences between respondents who specialize in different property types. Open-ended comments suggest that respondents are more optimistic about conditions for industrial and multifamily properties than they are for retail or office properties (see page 3). While this survey does not directly measure differences in outlook for different property types, the NAIOP Coronavirus Impacts Survey has identified notable differences in rent collections, acquisitions, and development activity between different property types since the survey first launched in April.
Expectations for Development Conditions
As in March, the September 2020 survey asked developers to evaluate how important interest rates, local economic conditions, local development approvals processes, environmental regulations, and other government regulations would be to their decisions to initiate or continue development projects over the next 12 months (answers to these questions are not factored into the NAIOP CRE Sentiment Index). The survey then asked developers how favorable they expected these conditions to be. The results are described in Table 1 on a 100-point scale.
Respondents identify local economic conditions and local development approvals processes as the most important of these factors. The most significant qualitative change since March is that respondents now expect conditions in their local economy to be slightly worse over the next 12 months instead of the slight improvement respondents expected in March. This aligns with their more pessimistic outlook on rents and occupancy rates. Although expectations for other conditions shifted slightly, the outlook for development approvals processes, interest rates, and government regulations are qualitatively similar to those in March: a generally negative outlook for government regulations and approvals processes, and a positive outlook for interest rates.
Differences Between Developers and Non-Developers
Three statistically significant differences emerged when comparing the responses of developers and building owners to non-developers (see Table 2). Developers and owners are less pessimistic than other respondents about future face rents, effective rents, and first-year cap rates. This suggests that developers may be more willing to engage in new development or building acquisitions than the sentiment index would otherwise indicate. However, this difference in expectations also suggests that other market participants, such as lenders, investors and brokers, are likely to adhere to more conservative property valuations.
Direct From Survey Participants
“Industrial and multifamily still seem to be strong in the markets I work in, and we look for that to continue over the next 12 months. Retail, office space and hospitality are where we have concerns for the next 12 months.”
“I primarily handle office and industrial in my market. I believe that industrial will fare well and has been holding steady during this time. Office, however, has been hit hard — tenants vacating, not paying rent, vacancy increasing.”
“Landlords will be aggressive to complete transactions with lower rents and shorter-term deals. They just want to fill the space. Tenants are aggressive on all points of the deal. It seems from national and regional reports and surveys [that] it will be a year before business gets back to what will be the new norm. Even in our Utah bubble, negotiations are aggressive, [and] sublease availability has increased with employees given a choice to work at home or [at the] office.”
“I think we're in about the second inning of the fallout from COVID-19. I see industrial faring well overall, though weighted heavily toward Class A product in infill markets. For most other property types, I would expect sublease space to continue to increase through midyear 2021, and direct vacancy to gradually increase as leases expire and companies downsize in an orderly fashion, probably through 2022. There is going to be a process of deleveraging which should be painful but not as bloody as the Global Financial Crisis, mostly due to high amounts of liquidity in CRE.”
“I think the economy has been affected by all the COVID-19 closings and slowdowns, but things are currently being buoyed by federal stimulus. When that ends, I think things will get worse — not bad, just worse — than where we are now, and will eventually bounce back by the middle of the decade.”
“Capital markets are constantly adjusting to market factors including Treasury rates, local supply and demand, and tenant credit. There is no broad-brush approach to valuation right now. Each market and deal are unique. […] Private capital seems to be the dominant influence right now as investors seek to redeploy equity between asset classes and geographically.”
“I am the CEO of a national commercial and multifamily mortgage banking firm. In order of highest [to lowest] level of distress: hotels, retail, office, multifamily and industrial. Capital is widely available for multifamily and industrial, and that will continue. Markets are healthy, but we anticipate some multifamily distress as unemployment stays high. Capital is less available for the other product types and the underwriting will be more stringent for debt, forcing more [expensive] equity into transactions.”