NAIOP Survey: One-Year Market Outlook Bolstered by Confidence in Employment, Occupancy Rates
Prospects for the CRE market moving ahead at a more robust pace are higher than what was expected six months ago, according to the latest NAIOP Sentiment Index conducted earlier this spring.
While the results, which reversed a consistent two-year downward trend in market sentiment, were recorded before the recent stock slump this month, at the time survey respondents believed that overall market conditions 12 months from now (in March 2018) would continue to be favorable for the commercial real estate industry, and they expected conditions would be better than they are today, according to NAIOP.
NAIOP said its sentiment index is 0.9% higher than the previous survey it conducted in September 2016, although it has declined 5.4% on an absolute basis since the first survey was conducted in February 2015.
The two largest positive changes in the survey that helped boost the outlook into positive territory were much greater confidence in employment and in occupancy rates.
Survey scores for adding employees (a 5% increase) and occupancy rates for new projects (a 5.3% increase) were both a major trend reversal for these two categories from the prior three surveys.
The NAIOP survey also identifies where respondents express concern: the costs of construction materials and labor and first-year cap rates.
Expectations for both materials and labor costs fell to larger negatives (decreases of about 3%) and optimism for first-year cap rates fell by 4.5%.
The Sentiment Index is designed to predict general conditions in the commercial real estate industry over the next 12 months. The forecast is not based on an analysis of historical data, but rather a look into the future by commercial real estate developers, owners and investors asked to respond to the same set of questions each time.
The data is compiled and analyzed by Tom Hamilton, Ph.D., MAI, CRE, and Gerald Fogelson Distinguished Chair in Real Estate at Roosevelt University in Chicago.
Direct Comments from the Survey Participants
NAIOP provided some of the more pertinent comments from participants but without attribution.
- “I am comfortable with a strong market over the next 12 months; however I believe we will be facing a much more difficult economy 12-24 months from now. The market exuberance about [President] Trump will fade, interest rates [will] begin to rise, the implications of overbuilding multifamily product will kick in, and the cyclical economy will begin a downward turn.”
- “As long as the equity and capital markets stay as strong as they are, I think any downturn we experience in the markets will be able to be offset and controlled.”
- “I see an unprecedented degree of uncertainty about [the] cost of money (interest and cap rates), market fundamentals (supply and demand), unforeseeable economic changes in the age of [President] Trump, and tax reform if it gains traction (loss of historic, new markets, and low-income housing tax credits; carried interest; new taxes to offset new spending; etc.). Benefits from promised deregulation may be counteracted by dysfunctional government managed by unaccountable appointees. We may have a series of re-starts in Washington.”