Survey Shows CRE Worries Are Broadening to Include Economic Fundamentals

In September 2022, CRE respondents surveyed for the NAIOP CRE Sentiment Index were primarily worried about the decreasing availability of debt and equity and rising cap rates. And they were indeed fretful, with the index registering a score of 47 for that month. Fast forward to the April 2023 survey and respondents are still concerned, giving the index the same score of 47, but their concerns have broadened to include economic fundamentals and property performance. 

“Our members remain wary of the strength of the overall economy,” says NAIOP President and CEO Marc Selvitelli in prepared remarks.

As a result, many of the respondents are paring their planned investments in new deals, the survey showed. They also are not adding to their employment ranks, a sure sign they recognize they don’t need more staff to work on more new deals.

The survey also highlighted that construction costs, which had gone up in recent months and years, are also expected to decline down the road. Labor costs also will grow slower than in prior surveys. But they’re not low in absolute terms, and the survey revealed that several responding think the still high costs will delay new development and building retrofits. So will regulatory costs in some markets. 

One survey participant put it this way, “The biggest issue we’re facing is that construction costs are still elevated (though finally stable), but the cost of debt has more than doubled while rents are either flat or increased slightly. This makes excellent deals harder to pencil and marginal deals not able to pencil at all. The NOI limits the amount of debt, requiring higher equity contributions.”

The survey also asked developers and building owners to assess the importance of interest rates, environmental and governmental regulations and local goings-on such as economic conditions, all of which might influence their projects over the next 12 months. And it asked how favorable they thought conditions might be. The results relayed several noteworthy findings, including:

• Respondents now rate interest rates as slightly more important than local economic conditions in their developmental decisions. They continue to expect interest rates to be unfavorable for development.

• They are less optimistic about the economy than they were last September and now expect somewhat unfavorable local economic conditions next year.

• They expect more adverse environmental and other governmental regulations than they previously did.

• They do not predict any improvement in local developmental approvals.

Who Participated

Altogether, 523 respondents from 374 distinct companies participated in this survey. Of those numbers, 71.9% work on industrial properties, 60.4% on office properties, 46.5% on multifamily and 44.9% on retail. The largest group is active in the West, followed by the South, East and then the Midwest.