Graphs and Observations

Download the Spring 2021 NAIOP Sentiment Index Report. 

Notable Changes from the August/September 2020 Survey

Figure 3 compares respondent expectations in April 2021 for the individual components that comprise the NAIOP CRE Sentiment Index to respondent expectations in past surveys. Values above 50 represent expectations that a condition will be more favorable for development in 12 months (e.g., higher face rents, lower construction labor costs or lower cap rates). Values below 50 represent expectations that a condition will be less favorable during the next 12 months.

Compared with the last survey, respondents offered a more optimistic outlook for all conditions that make up the index except for construction material and labor costs. Respondents’ outlook for individual components of the index were generally closer to pre-pandemic averages than the results of the two 2020 surveys. Notably, respondents now expect first-year cap rates to remain unchanged in 12 months, in contrast with past expectations that cap rates would increase.

Levels of agreement/disagreement between respondents remain close to those observed in the two surveys from last year, and they are higher than levels recorded in surveys from before the pandemic. This suggests continued uncertainty about future conditions. Lower-than-usual levels of agreement between respondents may suggest that the CRE Sentiment Index for April 2021 is less predictive of future market conditions than surveys from before 2020.

Some of the variation in the survey results may also reflect differences between respondents who specialize in different property types. Open-ended comments suggest that respondents are more optimistic about conditions for industrial and multifamily properties than they are for retail properties.

 Figure 3

Expectations for Development Conditions

The sentiment survey asks developers and owners to evaluate how important interest rates, local economic conditions, local development approvals processes, environmental regulations and other government regulations will be to their decisions to initiate or continue development projects over the next 12 months (answers to these questions are not factored into the NAIOP CRE Sentiment Index). The survey then asks developers how favorable they expected these conditions to be. The results are described in Table 1 on a 100-point scale.

As in the August/September 2020 survey, respondents identified local economic conditions and local development approvals processes as the most important of these factors. The most notable change since the previous survey is that they now expect local economic conditions to improve significantly. This change aligns with improvement in the sentiment index and in respondents’ outlook for general industry conditions. With some slight changes at the margins, the outlook for development approvals processes, interest rates and government regulations were qualitatively similar to those in September: a generally negative outlook for government regulations and approvals processes, and a positive outlook for interest rates. In open-ended comments, several respondents voiced concerns that state and local regulations, zoning changes and taxes would make development more difficult.

Table 1

Differences Between Developers and Non-Developers

Respondents were asked to identify their primary profession. When comparing the responses of developers and building owners to non-developers, four statistically significant differences related to the conditions that comprise the sentiment index emerged (see Table 2). In each case, developers/owners and non-developers expect conditions to improve, but the expected degree of improvement varies. The employment outlook appears to be somewhat brighter for non-developer respondents than within developers’ firms. Developers and owners are more optimistic about future face rents and effective rents than non-developers, but non-developers expect equity to be more widely available than developers. Differing expectations about future rents may lead non-developers to value commercial properties and new development more conservatively than developers.

Table 2

Direct From Survey Participants

“Industrial and multifamily still seem to be strong in the markets I work in, and we look for that to continue over the next 12 months. Retail, office space and hospitality are where we have concerns for the next 12 months.”

“I primarily handle office and industrial in my market. I believe that industrial will fare well and has been holding steady during this time. Office, however, has been hit hard — tenants vacating, not paying rent, vacancy increasing.”

“I believe the market is in somewhat of a holding pattern as the reopening from the COVID-19 pandemic materializes. As a result, I do not expect significant volatility until the bulk of businesses and schools have reopened fully and the foreclosure moratoriums end.”

“Industrial real estate is climbing in rents and sales prices. There is a high demand for industrial space now, and I believe it will continue to be that way for a while.”

“I think that industrial will stay very strong, that people will return to their offices gradually over the next year and that retail will recover some, but retail is under severe pressure from e-commerce.”

“Office [properties] in Tier 1 cities like New York and San Francisco, I believe, will see lower occupancy and rents for two to three years, with multifamily properties in these locations recovering much more quickly. Industrial/flex/ warehouse will likely remain tight on both vacancy and rents, [and] retail will lag with non-essential retail space (i.e., big-box department stores) likely gone for good. There is plenty of debt and equity available, it is just significantly more selective than it has been in recent memory. As rates increase with inflation, demand will decrease for a short time until borrowers adjust their thinking. Equity knows it is in high demand with asking rates increasing 2% to 4% already this year.”

“With [Federal Reserve] Chairman Jerome Powell committing to hold interest rates low for the next two years and with business beginning to open up the more people are vaccinated, I believe that Q4 of 2021 and all of 2022 will be filled with high consumption and more demand for logistics buildings. Not sure what will happen to office or retail. Hospitality and travel will take a while to come back.”

“We work in life sciences, [and] we see continued investment and growth in this sector for the next 12 months.”

“I am deeply concerned with the push for rent control and other taxation measures against multifamily investments. […] Vacancies are up, rents are down, and local governments prevent the permitting of new housing while demanding affordable housing. The circumstances have become untenable for developers.”

“If corporate taxes are changed this year or next, this could be a huge letdown in the marketplace.”

“Zoning is increasingly more difficult.”