CRE Sentiment Makes a Surprising Turn

There appears to be a spring in the step of CRE developers and building owners now that Spring 2024 has arrived. The gloom that pervaded their outlook for the year ahead in 2023 surveys has given way to a mild optimism as NAIOP’s index of CRE sentiment rose above 50 for the first time in 18 months, in the expectation that conditions will improve over the next 12 months.

The index only reached 52, but it reflected a more positive outlook for every component except construction costs.

Significantly, respondents believe capital will start flowing more easily in the year ahead.

Prospects for availability of both debt and equity improved from lows in September 2023 to achieve scores of 58 on the index, along with first-year cap rates. NAIOP – the Commercial Real Estate Development Association – attributed this to the expectation that interest rates will fall over the next 12 months.

Developers and building owners now expect greater deal volume over the year ahead. “Their expectation of handling a higher dollar volume of new projects and acquisitions reflects an improving outlook for capital availability,” the report noted.

Industrial projects are likely to be targeted by 40.6% of respondents and multifamily by 24%. Some 7% will focus on data centers, 6% on retail, 5.5% on office, 4.8% on mixed-use, 4.2% on medical office, 3.1% on life science, 1.3% on self-storage, 0.7% on hospitality, and 2.2% on other types of development.

The outlook for occupancy rates and effective rents also improved. Higher demand for industrial, retail and multifamily is anticipated, but office will continue to struggle. Respondents’ more cheerful outlook for CRE tallies with their view that general industry conditions will get better in the year ahead with an improved economy in the forecast. Higher employment in their own firms is also likely.

Two areas that failed to rise above the baseline of 50 on the index were construction materials costs and labor costs. And while developers and building owners rated favorable local economic conditions at 54 on a 100-point scale, they were more negative about regulatory issues like local development approvals, environmental regulations, and other government regulations. “In open-ended comments, a few respondents expressed concerns that a range of federal, state and local government policies would hinder development, including environmental regulation, slow development approvals and real estate tax increases,” the report noted.

Red tape could also limit opportunities to build much needed housing, one respondent commented. “We are very excited for all of the funding that is coming for housing, but state/local entitlement processes are [creating a] bottleneck. There is a housing crisis and when it takes 24 months or longer to entitle a project, then 18 months to build the housing, problems will only get worse before they get better.”