Graphs and Observations

Download the Spring 2018 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 at CRE companies are the highest they have been since the September 2015 survey and represent a 5.80 percent increase in the employment score since the low point registered in September 2016. Scores for this question have consistently ranked among the highest in the survey since 2015; however, as noted earlier, in the current survey responses were widely dispersed indicating disagreement among respondents. As such, in the March 2018 survey, the employment question is contributing less weight to the overall Sentiment Index. Even so, the overall employment outlook is still quite positive, indicating that survey respondents expect they are likely to add more jobs in 2018 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 occupancy rate score (0.75) is the lowest positive response in this survey, and it reflects the second highest level of agreement among survey respondents. This means there is certainty among the respondents that occupancy rates are likely to grow. However, the slight decline (by 0.80 percent) indicates occupancy rates may grow more slowly than expected six months ago, potentially reflecting the maturing market. The March 2017 score appears to be a bit of an anomaly given the otherwise steady softening in respondents’ scores since the survey’s inception. Two consecutive downward readings might be a sign that commercial real estate occupancy rates may be expected to flatten in the next 12 months.

Direct from the Survey Participants

"We think demand for office space, industrial facilities and housing will continue to be strong as people migrate to job centers."

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 maintained a relatively stable, highly positive level. In the March 2018 survey, this question featured the least dispersion among the responses, indicating significant agreement among survey participants. This survey question has helped keep the overall Index positive over the past two years. The score for face rents (1.45) is just 1.00 percent less than it was six months ago. Overall, face rents are expected to remain positive and improve between now and early 2019.

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 slightly by 0.20 percent compared to the September 2017 survey but the positive score of 1.13 indicates that effective rents are expected to continue to rise over the next year. With readings for both face rents and effective rents remaining in solidly positive territory but both falling slightly, it may be that respondents anticipate that rents may begin to stabilize.

Direct from the Survey Participants

"For items [in this survey] marked "the same" or "in the middle" — that’s not a bad thing, considering how good things are right now from a landlord/developer perspective. [The] biggest concern is [the] rising costs of construction, with rising interest rates being an issue, but very secondary in my mind."

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 the three prior surveys, the construction materials costs score (-2.35) provided the most downward pressure to the overall Sentiment Index. Compared to September 2017, the score for construction materials fell by 0.50 percent, and hit an all-time low. This indicates that survey respondents expect the cost of construction materials to rise in the next year. The consistency of responses to this question indicate that expectations of rising costs are fairly uniform across the U.S. and across product types. Of note is that while this survey was open, President Trump had not yet imposed stiff tariffs on imported steel and aluminum so the anticipated effects of that action are not reflected in these figures.

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) remained the same over six months and continues to be the most negative component of the overall Sentiment Index. Survey responses were less consistent (more dispersed) than those relating to construction materials costs; however, given the large negative score for this question, survey respondents expect construction labor costs to continue to rise over the next year at a greater rate in 2018 than they did in both 2016 and 2017.

Direct from the Survey Participants

"[I] think [the] recovery was getting long in [the] tooth, but tax cuts will keep things selectively improving (albeit at [a] slower pace) for two to three years. In any event, until the rest of the globe presents a viable alternative to [the] U.S. (terror in Europe, investors removing wealth from China, etc.) we will not see a dramatic correction."

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 continued its steady rebound in this survey, increasing 2.00 percent over six months. Since hitting a low point in March 2017, the available equity score has increased 5.00 percent and is at its highest level since the September 2015 survey. The available equity measure is also the second highest positive contributor to the overall Sentiment Index, and since it had a more tightly packed response rate, it contributed greatly to the overall Sentiment Index’s positive level.

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 registered a moderate rebound for the second consecutive time (2.00 percent), continuing the reversal of a consistent decline that existed between February 2015 and March 2017. Like equity, debt capital is expected to be available at still favorable rates over the next twelve months for projects in the pipeline.

Direct from the Survey Participants

"Pricing remains strong but compression will slow as rates rise. Fundamentals and tenant demand remain strong and I see rents continuing to grow, although the growth will be a bit slower but still healthy. There is a ton of equity available, and debt still remains consistent and available."

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 there is a solid chance that first-year cap rates will increase in the coming year, with this survey’s level  the most pessimistic ever recorded (-0.88). This score has oscillated consistently between March 2017 and March 2018. The silver lining with this question is that survey responses were dispersed, indicating that some believe cap rates will definitely rise, while others are not so certain. Though the score was negative, this inconsistency among the respondents meant that the question carried a low weight in the overall composite Index. Of note is that while this survey was open, the Board of Governors of the Federal Reserve had not yet announced plans to raise the federal funds rate three times in 2018.

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 rose in this survey compared to the reading taken in September 2017. It was boosted primarily by big gains in the capital markets questions, even though the scores declined slightly for occupancy rates, face rents, effective rents, construction materials costs and cap rates. The 0.58 score for this question is 2.30 percent higher than the reading noted six months ago, and it is at about the same level as it was one year earlier in March 2017. This overall score is still a positive sign for the CRE industry in that survey respondents expect the commercial real estate climate will improve slightly over the next 12 months, a score that is fairly consistent with responses given in the spring surveys administered in each of the prior two years.

Direct from the Survey Participants

"I think the biggest risk to the industry right now is the [Federal Reserve]. By pushing interest rates up too aggressively, they are likely to throw us into recession — not necessarily within 12 months, but soon."