In a forward-looking snapshot of the state of the nation’s commercial real estate, the latest CRE Sentiment Index from NAIOP points to a bullish outlook for the next year. In the aggregate, respondents showed more support for the notion that the fundamentals underpinning commercial real estate will be stronger in 12 months than they are today.
The NAIOP Sentiment Index is designed to predict general conditions in the commercial real estate industry over the next 12 months. Approximately 7,000 respondents—5,000 of which are developers, investors and operators and the balance being commercial real estate brokers—gave their expectations for a number of factors, including occupancy, rents, construction/labor costs, cap rates and the availability of equity and debt.
The responses showed positive changes in seven of the nine questions that underpin the Index. This survey’s 0.66 Sentiment Index reading is the highest posted since the full survey commenced in March 2016. A consistent, positive Index level over the past 36 months is a sign that the greater commercial real estate market has been operating at a steady pace and it is expected to support continued expansion for at least 12 more months.
The most positive changes between the March 2018 survey and this latest one were optimistic expectations regarding the availability of capital (both debt and equity), as well as the outlook that effective rents will rise over the next 12 months.
When asked, based on their own projects, where respondents believe effective rents will be in 12 months, the majority indicated they would be higher. These expectation increased 2.20 percent over the previous six months, the highest score for this question in three years.
Year-over-year, the readings for the availability of equity and debt capital increased by 2.50 percent and 2.80 percent respectively. This continues the strong reversal for both capital sources after each slid consistently between March 2016 and March 2017.
“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,” one survey participant said. “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.”
At the same time, however, respondents are still greatly concerned about the costs of construction materials and labor as indicated by the lowest score recorded for each category since the survey started. There was a low level of consistency among responses regarding material cost, possibly indicating that expectations of rising costs aren’t uniform across markets and/or product types. There was far more unity on the belief that labor costs will rise in the next 12 months, however.
“The confluence of [a] tight labor [supply], increasing materials costs, rising cap rates and increasing rates are slowing investment, changing outlooks and expectations,” said one respondent, who expects a downturn to begin in the next 12 months. “The reason is the oversupply of products and too many funds increasingly chasing too few reasonable opportunities.”
One question asked of the survey-takers but not included in the aggregate score is to the general sentiment regarding conditions in the commercial real estate industry over the next 12 months. Though most of the previous questions yielded bullish responses (labor and construction costs being the outliers), this direct question regarding overall market expectations fell slightly since the March 2018 survey.
