Survey respondents believe the market will continue to favor the real estate industry.
IN APRIL 2016, NAIOP launched a quantitative sentiment index that indicates, in a single number, whether respondents expect general real estate conditions to improve, decline or stay the same over the next 12 months. The NAIOP Sentiment Index is not based on an analysis of historical data, but rather is a look into the future by real estate professionals who develop, invest in and operate commercial real estate. For many years, NAIOP leaders have expressed a desire to develop a NAIOP-branded indicator that could convey CRE conditions in one number. In 2016, this became a reality.
The Index is based on nine survey questions about jobs, the space markets, construction costs and the capital markets. The responses are combined into a composite that is scaled from positive 5 to negative 5. Readings of zero mean that respondents expect no change in CRE conditions over 12 months. Readings above zero indicate conditions are expected to improve, while readings below zero mean conditions are expected to deteriorate.
The responses from the survey’s questions are not equally weighted. Instead, weighting varies based on how dispersed the responses are. Questions with tightly packed responses (meaning there is more consistency among the answers to that question) are more heavily weighted than those with more dispersed responses (which indicate less consistency).
If every participant in the survey selected the most optimistic answer to each and every question, the Index would be positive 5. Conversely, if all participants chose the most pessimistic response to each and every question, the Index would be negative 5. The Index is on a 10-point scale, meaning that changes to the composite scores — and the Index itself — will range between zero and 10.
The survey’s 10th and final question is about overall sentiment regarding future conditions. It was designed to serve as a verification of the Sentiment Index and is not included in the calculation of the Index.
The results are presented in a five-page report that includes graphs and commentary about the Index as well as responses to each of the questions. The graphs convey results over time, enabling readers to clearly spot movement and trends.
The NAIOP Sentiment Survey will be conducted biannually, each March and September. The survey is sent to 5,000 NAIOP principal members who are developers, investors and owners in the office, industrial, retail and multifamily sectors. As an incentive to participate, all participants are sent the breakdown of responses to each survey question three days after the survey closes. This underlying information is used to calculate the Index and composites, but it is not released to the media or NAIOP members; it is sent exclusively to survey participants.
The survey was beta tested with a group of about 600 NAIOP leaders in February and September 2015, and the first live survey was sent to all NAIOP principal members in March 2016.
The inaugural Sentiment Index reading of 0.60 indicates that respondents believe that market conditions in 12 months (March 2017) will continue to favor the real estate industry and could even be slightly better than they are today. Respondents are most optimistic about continued job growth, but concerned that debt may not be as plentiful in 12 months as it is today.
The biggest positive changes between the two beta tests and the first live survey related to the cost of construction materials and labor. Survey respondents still expect these to rise, but not by as much as they did in September 2015. The readings for materials and labor costs demonstrated improvements of 0.55 and 0.33 points, respectively.
The three most notable declines came in relation to debt, equity and employment, with composite scores for availability of debt and equity declining by 0.95 and 0.67 points, respectively. Despite this downward movement, the readings are still positive, meaning respondents expect capital to remain available. The employment reading contracted by 0.83 points, but with a composite of 1.85 it was the highest-scoring question in the survey.
NAIOP thanks Tom Hamilton of Roosevelt University for conceptualizing and managing this survey and Index, as well as the many NAIOP Distinguished Fellows who contributed feedback and guidance over the past two years.
With the business cycle appearing to mature, this is a critical time to monitor real estate fundamentals. We are excited that this indicator is up and running, and anticipate that it will become an informative tool for NAIOP members and industry practitioners.
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