CRE Sentiment Index Points to Cautious Optimism: NAIOP

Illustration courtesy of Gerd Altmann via Pixabay

While commercial real estate users remain keen on the industry’s future over the next 12 months, their confidence is not quite as strong as it was last fall, according to the spring edition of the NAIOP CRE Sentiment Index. The current index is 53, marking a three-point drop from last fall’s index score of 56 in September 2021.

Despite the slight decline in the index, the forecast remains generally positive for the future of CRE. A score of 50 on NAIOP’s index indicates that survey respondents anticipate no change in CRE conditions in 12 months, while a score above or below 50 suggests favorable or unfavorable conditions, respectively. NAIOP queried nearly 350 participants for the survey.

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The spring 2022 index is more on par with the year-over-year index of 54 from spring 2021, yet it remains a considerable improvement from the score of 45 seen during the first month of the pandemic in March 2020. However, the index has yet to return to the pre-pandemic high of 57, when respondents were highly confident in conditions for CRE in the upcoming months.

The decline in the spring index can be attributed to two major factors: increasing interest rates and inflation. “Respondents are concerned about the effect of rising interest rates on capital markets and real estate valuations. In contrast with September 2021, they now expect first-year capitalization rates to rise and debt to be less available,” according to NAIOP’s report on the survey. “Reflecting recent inflation, respondents are more pessimistic about construction costs than in any previous survey.”

Balancing act

Survey participants’ expectations regarding rents go a long way in compensating for any negative prospects they hold for CRE over the next 12 months, thus the ongoing optimism for the market. The index score is 71 for face rents and 67 for effective rents, representing scores higher than any point in the past two years and higher than the 2016-2019 average.

“Respondents remain optimistic that occupancy rates will continue to improve, and they also believe that face rents and effective rents will rise faster than in past surveys, as building owners pass some cost increases on to tenants,” as noted in the survey report.

Survey participants now anticipate a slight deterioration in general conditions in the CRE industry in the upcoming 12 months, as reflected in the score of 48. Yet, it appears little will keep industry players away from the thriving industrial sector, as 59.5 percent of respondents indicated that they plan to be most active in projects or transactions related to the sector over the next 12 months.

Ultimately, NAIOP’s index appears to suggest that the intense degree of shared conviction seen in industry sentiment before the pandemic has yet to return among its participants.

“Levels of agreement / disagreement between respondents remain higher than levels recorded in surveys from before the pandemic. This suggests continued uncertainty about future conditions,” according to the report. “Lower-than-usual levels of agreement between respondents may suggest that the CRE Sentiment Index for April 2022 is less predictive of future market conditions than surveys from before 2020. Lower levels of agreement among respondents may also reflect a more challenging environment for some property types and geographic markets.”

Alas, while the general prediction for the next year is positive, it’s a wait-and-see forecast for the specifics.

Read the full report by NAIOP.