Graphs and Observations

Download the Fall 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 remain basically unchanged (down by 0.20 percent) since the last survey, conducted in March 2017, and they are still much better than readings from both surveys conducted in 2016. The score for this question is highly positive (2.30), indicating that survey respondents expect that they are likely to add more jobs over the next year than they thought they would in 2017.

Occupancy Rates

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

Occupancy Rates

The 0.83 score for occupancy was a significantly negative change compared to the March 2017 survey, and its level is lower than it was for all prior surveys. The 6.50 percent decrease is the greatest change among all questions in the current survey and continues a downward trend that began with the September 2015 survey. Based on this survey’s responses, occupancy rates are expected to grow, but more slowly than expected six months ago, underscoring respondent comments about the maturing cycle.

Direct from the Survey Participants

“[There is a] big difference between office and industrial [properties]. In office, face rates will be up and net effective [rents will be] flat or slightly lower. In industrial, both will rise.”

Face Rents

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

Face Rents

Unlike occupancy rates, the 1.55 face rent score represents a slight up-tick and is an indicator of continued improvement over expectations from the prior 18 months. This score denotes a 0.20 percent increase in expectations among survey respondents and was, like employment, a major contributor to the positive reading of this survey’s Sentiment Index. Overall, face rents are expected to remain positive and improve between now and the summer of 2018.

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 decreased 1.00 percent in this survey, yet the reading remained positive (1.15) for CRE markets. As such, effective rents are expected to rise somewhat over the next year, however, at a slower pace than what was expected six months ago. Consistent with the March 2017 survey, 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 rise slightly in the coming year.

Direct from the Survey Participants

“The last few years have seen a very high rate of rent growth, particularly in the industrial sector. That combined with cap rate compression and long-term loans continuing to refinance at exponentially lower rates, has yielded an extremely strong performance in asset returns. [It] does not appear that [this] will subside in the next 12 months with e-commerce driving a new wave of demand [together] with a more timid pace of speculative construction that is likely caused by more expensive land…and less aggressive financing. In short: lease rates have been skyrocketing and that pace will continue.”

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 much less optimism about construction materials costs in this survey than in prior surveys with a 3.50 percent decrease. The score reached its lowest point ever (became more negative), going from -1.95 to -2.30. This decrease indicates that respondents expect the cost of construction materials to be much higher in the next year, as rebuilding following the recent hurricanes and earthquakes generates competition for both materials and labor.

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 (-2.43) is about 3.50 percent “greater” than the score reported in the March 2017 survey. It is now a greater negative than ever recorded in this CRE index, surpassing the previous low of -2.13 in the February 2015 beta survey. This large negative score indicates that respondents expect construction labor costs to rise during 2018 at a greater rate than they expected in both 2016 and 2017.

Direct from the Survey Participants

“[The] impacts of natural disasters — hurricanes Harvey and Irma — will have a significant impact on construction costs — labor and materials — in the south and the west, if not nationwide.”

Available Equity

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

Available Equity

The reading regarding available equity rebounded after declining steadily over the prior two years. In the past six months, this score increased by 3.00 percent and is where the reading stood in March 2016. Any time this attribute’s score has a value that is greater than zero, equity is expected to be available for new projects.

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 registered a large rebound (4.70 percent), reversing a consistent decline since the February 2015 survey. Like equity, debt capital is expected to be available at still favorable rates. Some real estate owners have reported receiving quotes from multiple lenders for some office but especially industrial projects in key submarkets.

Direct from the Survey Participants

“Fundamentals are still solid and development hasn’t gotten out of line, but the cycle feels mature and pricing is past peak levels in many markets. However, demand remains strong in the markets we’re looking to acquire in so as long as investors stay disciplined, I don’t think the market will change a whole lot over the next 12 months, unless there is a black swan event on the horizon.”

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, but less severely than they were expected to rise six months ago when the March 2017 survey was conducted. The September 2017 score was less negative (with a score of -0.55), resulting in a 2.70 percent positive change. In other words, the current survey score rebounded significantly from the March 2017 score of -0.83. This result indicates that respondents anticipate an increase in project risk, however, the expectation is less severe than what was reported six months ago.

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 occupancy rates and both construction labor and materials costs — moved downward in this survey. The 0.35 score for this question is 3.00 percent lower than the reading noted six months ago and it is at about the same level as it was one year ago. The score is still a positive sign for the CRE industry in that survey respondents expect an upbeat commercial real estate climate over the next 12 months, but a slightly less positive one than six months ago..

Direct from the Survey Participants

“[I] think a lot of people are waiting for [the] bid/ask spread to narrow with sellers becoming realistic, along with…more opportunities [to purchase]…distress[ed properties] from those who were undercapitalized or over-levered.”