Graphs and Observations

Download the Spring 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 remained steady at CRE companies with a score of 2.48, which is unchanged from September 2018. This level represents a 3.50% increase during the past 18 months and 8.30% growth since the September 2016 survey. Responses to this question have consistently ranked as the most positive market indicator in the survey; however, responses in the current survey were widely dispersed, indicating disagreement among respondents. Because of this, the employment question contributes less weight to the March 2019 Sentiment Index. The overall employment outlook remains positive, indicating that survey respondents are likely to add more employees going into 2020.

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 (0.63) fell 3.20% from September 2018 and is the lowest individual positive response in this survey. It also is tied with the effective rent category for the most consistent agreement among survey respondents. The positive 0.63 score means there is greater-than-average certainty among the respondents that occupancy rates are likely to increase during the next 12 months. The decrease is a reversal of what appeared in the September 2018 survey, and it might indicate that demand will increase at a more tempered pace through the next 12 months.

Direct from the Survey Participants

"Working with industrial assets, demand for product is outweighing the supply. Rents and absorption levels are high across the board, with vacancy at historic lows. Do not see the trend stopping, recession or not, as the infrastructure of commerce has a large footprint. That will only continue to expand."

Face Rents

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

Face Rents

Responses regarding face rents have maintained a stable, positive level since March 2016. For the past 18 months, this question featured the least dispersion among the responses, indicating significant agreement that face rents will rise into the next year. This survey question, along with employment and the availability of both equity and debt capital, has helped keep the overall Index positive during the past 3.5 years. The score for face rents (1.53) is on par with scores recorded since the survey’s inception, but it is 1.50% lower than it was six months ago. Overall, face rents are expected to remain positive and improve between now and early 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 1.08) decreased 2.70% compared to the September 2018 survey and are about equal to levels recorded between September 2016 and March 2018. This indicates that expectations have tempered 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 both face rents and effective rents remaining in solidly positive territory, respondents appear to anticipate modest growth in property rental income during the next year.


Direct from the Survey Participants

"We see a continuing disconnect between values determined by historically low cap rates, and the risks and realities of capital requirements to keep multitenant buildings well occupied and maintained."

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 -2.15) provided significant downward pressure on the overall Sentiment Index. Compared to September 2018, however, the score for construction materials improved by a solid 3.30%. Survey respondents expect the cost of construction materials to rise during the next year, but at a slower pace than the prior three surveys. Inconsistent responses to this question indicate that expectations of rising costs are neither uniform across the country nor across product types, and the negative perception is lessening.

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 (also -2.15) is less negative in this survey compared to September 2018, and much better than the three most recent surveys. Along with construction materials, these two items remain the most negative components of the overall Sentiment Index. Survey responses were more inconsistent 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 during the next year, though perhaps at a slower rate than indicated in previous surveys.

Direct from the Survey Participants

"I am optimistic about the overall outlook for the next 12 months — especially the availability of capital — but cautious about rent growth. Occupancy will likely remain constant."

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 (1.60) continued its steady rebound, increasing 0.70% over the prior year and 2.70% since the September 2017 survey. Since hitting a low point in March 2017, the available equity score has increased 5.70%. The available equity measure contributes to the overall Sentiment Index’s positive level. Respondents remain optimistic about the continued availability of equity capital into 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 1.63) continues to increase and continues to register highly consistent responses from survey respondents. This is in direct contrast to the consistent and sharp decline that existed between March 2016 and March 2017. Like equity, debt capital is expected to be available at still favorable rates over the next 12 months. Responses for this question were positive and fairly consistent across survey participants.

Direct from the Survey Participants

" We have been worried about a possible recession and higher interest rates for several years. I don't expect any meaningful increase in interest rates in the near future, but the fears of a recession seem more real now. It may not start in 12 months, but is likely in the next 24 months."

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 -0.45) could increase less in the coming year, with this survey’s score rebounding by about 4.30% over the previous year. This score had oscillated consistently between March 2016 and September 2018, so this survey’s improvement breaks that prior trend—which indicated a decline between September 2018 and March 2019. The volatility in responses for this question is nearly proportional, indicating that some believe cap rates will rise, while a slight majority believe they will be steady or fall.

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 (0.33) fell by 2.20% compared to the reading taken in September 2018; however, it is roughly equivalent to the score reported in both September 2016 and September 2017. Although this score is lower than the prior two surveys, it is still a positive value, indicating a tempered yet optimistic view of the real estate development market during the next 12 months.

Direct from the Survey Participants

"Supply/demand conditions for industrial remain in balance except for select low-barrier-to-entry submarkets. Construction costs, labor availability and entitlement friction will keep a lid on rampant supply growth. The key is the continued demand drivers as supply chains shift and adjust to demands of new distribution networks."