Graphs and Observations

Download the Fall 2018 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 at CRE companies (with a score of 2.48) continue to rise and are the highest since the September 2015 survey. They represent a 3.50 percent increase in the employment score over the past year and 8.30 percent growth since the September 2016 survey. Responses to this question have consistently ranked as the most positive market indicator in the survey since its inception in 2015; however, as noted above, responses were widely dispersed in the current survey, indicating disagreement among respondents. As such, in this September 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 2019 than they thought they would in 2017 and 2018.   

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 (0.95) is the lowest of the positive responses in this survey, and it carries significant agreement among survey respondents. This means there is greater-than-average certainty among the respondents that occupancy rates are likely to increase. The positive reading indicates that respondents expect occupancy rates to rise over the next 12 months. This is a reversal of a downward trend since inception of the survey (with the exception of the March 2017 score, which appears to be a bit of an anomaly). This reversal might indicate that demand is expected to continue to increase due to forecasts of steady growth in the general economy.  

Direct from the Survey Participants

"Capital is driving the market. You are starting to see some questionable developments and investments, but not to the extent that would lead to a major correction. If interest rates only creep up gradually, I think we are in for a good run for 12 to 18 more months [at a] minimum. Consumer sentiment is off the charts. [The] U.S. economy [is] not even hitting on all cylinders yet. Times are good right now. Don't sleep; just make deals!!!"

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 since March 2016. In both the March 2018 and the September 2018 surveys, this question featured the least dispersion among the responses, indicating significant agreement among survey participants regarding the outlook for face rents. This survey question, along with employment, has helped the overall Index stay positive over the past three years. The score for expectations regarding face rents (1.68) is 1.30 percent greater than it was a year ago and 2.30 percent greater than it was six months ago. Overall, face rents are expected to remain positive and improve between now and the later quarters of 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 (with a score of 1.35) increased 2.20 percent over the previous six months. This is the highest score for this question in three years, indicating that rents are expected to increase by more than previously anticipated. With readings for both face rents and effective rents remaining in solid positive territory and expected to rise over the year, respondents anticipate property rental income will grow over the next year. This is consistent with expectations observed in the prior four surveys going back to March 2016 where the trend indicated a slow, steady growth rate. It also parallels positive sentiment regarding overall growth of the U.S. economy into 2019. 


Direct from the Survey Participants

"Lack of construction labor is causing delays and construction cost increases. The shortage of labor in all sectors of the economy is the No. 1 issue businesses are dealing with. Overall, capital spending is good and corporate earnings are healthy for continued expansion."

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 survey results going back to early 2016, construction materials costs (score of -2.45) provided significant downward pressure to the overall Sentiment Index. Compared to September 2017, the score for construction materials fell by 1.50 percent, and again is at an all-time low. This indicates that survey respondents expect the cost of construction materials to continue to rise over the next year. The low level of consistency among responses to this question indicates that expectations of rising costs among survey respondents are neither uniform across the country nor across product types.   

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 (-2.48) became more negative (by 0.50 percent) over the past year and continues to be the most negative component of the overall Sentiment Index. Survey responses were slightly more consistent (less 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, more than they did in all years going back to 2016. 


Direct from the Survey Participants

"Historically speaking, we are in a very good market. [I] don't see this getting appreciably better. Interest rates [are] likely to rise; construction and labor costs [are] likely to rise."

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 (1.58) continued its steady rebound in this survey, increasing 2.50 percent over the prior year and 0.50 percent over the previous six months. Since hitting a low point in March 2017, the available equity score has increased 5.50 percent and is at its highest level since the September 2017 survey. The available equity measure is one of the most positive contributors to the overall Sentiment Index, and since there was good consistency among the responses, it contributed greatly to the positive level of the overall Sentiment Index. 

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 1.48) continues to increase and registered a moderate rebound for the third consecutive survey (2.80 percent since September 2017), 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 12 months for projects in the pipeline at companies that responded to this survey.

Direct from the Survey Participants

"… Basically, the landscape of commercial office buildings is changing faster than we have ever seen in the past. Based on the speed of changes happening in technology, I predict substantial changes to our traditional real estate cycles."

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 chance that first-year cap rates (score of -0.50) will increase slightly in the coming year. However, this score was slightly “less negative” than the score posted six months ago, indicating that expectations for rising rates have weakened. This score has oscillated consistently between March 2017 and March 2018. The silver lining for this question is that survey participants were less consistent in their responses, indicating that some believe cap rates will rise, while others believe they will be steady or fall. Though the score was negative, inconsistency among the respondents means that the question carries a low weight in the overall composite Index.

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 final question of the survey is designed to verify the Sentiment Index and is not included in the calculation of the Index. (For more information, read “Understanding the Index” on page 5.) The general sentiment score in this survey (0.55) rose by 2.00 percent compared to the reading taken in September 2017; however, it is down slightly (by 0.30 percent) over the previous six months. Although up over the year, it is interesting to note that this direct question regarding overall market  expectations fell slightly since the March 2018 survey, whereas the majority of other survey responses became more positive (except for the outlook relating to construction labor and materials costs). 

Direct from the Survey Participants

"Almost all gains in [the] stock market have come from … four companies: Facebook, Amazon, Netflix and Google. If they falter, we are in for a big downturn."