Graphs and Observations

Download the Fall 2021 NAIOP Sentiment Index Report. 

Notable Changes from the April 2021 Survey

Figures 3 and 4 compare respondent expectations in September 2021 for the individual components that comprise the NAIOP CRE Sentiment Index to 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.

Respondents are more optimistic about face rents, effective rents, occupancy rates and employment in their own firms than in April, and they expect cap rates to decline in contrast to past expectations that cap rates would increase or remain flat. Respondents are also less pessimistic about the rate at which construction material costs will increase. A score of 31 for materials costs was close to the 2016-2019 average of 29, indicating that respondents expect inflation to moderate. However, some respondents noted that high construction costs and supply shortages continue to affect development projects.

In April 2021, respondents expected a major improvement in general industry conditions (a score of 66) through April 2022. That is a reversal from the 2020 surveys, when they had expected deteriorating conditions. In the current survey, respondents still expect strong improvement in general conditions over the next 12 months, though they expect the pace of improvement through September 2022 to slow, giving this metric a score of 61. This shift in expectations may be due to respondent concerns about the Delta variant, though it is also possible that they simply expect a gradual return to normal industry conditions. As the pandemic’s most severe effects on the industry recede and commercial real estate professionals observe that the most rapid phase of the economic recovery has already occurred, expectations for future improvement should gradually converge with the pre-pandemic range, when respondents expected more modest changes in industry conditions from one year to the next.

Levels of agreement/disagreement between respondents remain 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 September 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 office or retail properties, with some respondents expressing concerns about the potential effects of the COVID-19 Delta variant on tenant demand for these property types.


Expectations for Development Conditions

The sentiment survey asks developers and building 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 expect these conditions to be. The results are described in Table 1 on a 100-point scale.

Table 1

The results of the September survey revealed little change in how respondents view these development conditions over the next 12 months. Local economic conditions and development approvals remain the two most important conditions to respondents, and their views on the favorability of each condition have not changed much since April. Respondents continue to expect local economic conditions and interest rates to be supportive of development, and for local development approvals, environmental regulations and government regulations to be slightly unfavorable. Open-ended comments from some respondents also reflect concerns about development approvals and local and federal regulation.

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, two statistically significant differences related to the conditions that comprise the sentiment index emerged (see Table 2). While both groups have a positive outlook on face rents and general industry conditions, developers and owners are slightly more optimistic about face rents than other respondents, while non-developers are slightly more optimistic about general industry conditions than developers and owners. 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

“Lack of supply across multifamily, single-family rental and industrial are our main issues presently. We are seeing increased interest in investment office, while owner-user office seems to be continuing its momentum.”

“West Coast industrial markets continue to strengthen amid strong demand in the e-commerce, manufacturing and life science sectors.”

“I think that I would have been much more optimistic about the next 12 months were there more positive news about containing and working through the Delta variant. Unfortunately, that is not the case, and it appears that the ‘return to office’ has been delayed again.”

“The return to a formal office setting remains to be determined, but early indications are that companies [plan] to reduce space and rents as leases expire.”

“Labor and material shortages will continue to drive costs up over the next 12 months. Once these two stabilize, costs will continue to escalate, but not at the rates we have seen over the past year.”

“Supply constraints in many segments (including the need for larger-box space) continue to put pressure on delivery across the board. I'm concerned that an extended supply impact will ultimately diminish demand.”

“Approvals for ground-up development with local municipal and state jurisdictions remain a challenge.”

“Increased taxes and regulations will hurt the market, in some cases severely.”