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Interpreting and Applying the NAIOP Sentiment Index

The inaugural Spring 2016 Sentiment Index Report provides a means to gauge what’s happening in the marketplace and where thought leaders and development community leaders believe the commercial real estate (CRE) market will be one year into the future.

NAIOP hosted a webinar on April 21 to answer questions about the new report and discuss the implications around the results. Thomas Hamilton, Ph.D., MAI, CRE, and Gerald Fogelson Distinguished Chair in Real Estate at Roosevelt University in Chicago, who compiled and analyzed all data for the Sentiment Index report, led the webinar. Hamilton offered a look at the methodology used in the initial surveys that informed the Index, discussed the results and implications of the current report and answered attendee-submitted questions.

“Most of the studies in the market are historic; they look at data that has happened in the past – a rearview mirror approach to the real estate market,” Hamilton shared during the webinar. “The individual nine questions that are used to comprise the Index are important bits of information about specific components of the CRE market, but they are rolled into a single number to give us a consensus as to what the membership believes the direction of the CRE market will be one year forward.”

Hamilton covered the real estate fundamentals that were included in the survey, explained why they were included, and shared insight and implications that can be gleaned from the data. He pointed out that respondents’ outlook on construction labor costs was the most negative fundamental in the current Index. Looking at construction labor, Hamilton said, “This one factor, of the nine individual components that are in the Index, was the most negative of all of the indicators, which in turn was the largest contributing factor in the overall Index and brought it down the greatest proportion.” The survey question “For projects on which you are seeking bids, where do you believe the cost of construction labor will be in 12 months?” had a response of -1.80 for March 2016 compared to -2.13 for September 2015. “The 0.33 change in the Index component on a 10-point scale would be about an improvement of about 3.3 percent. So we’re seeing an improvement in construction costs. They are a hindrance to the development marketplace, but it’s at least moving in the right direction,” Hamilton said.

Hamilton also talked about inferences that can be made by comparing responses to the survey questions about face rents and effective rents: “When we look at the responses to both face rents and effective rents, we’re actually able to get a little extra information on that. Not only when face rents or effective rents are positive is that a good sign for the market, we can look at the differential between [the two] to give us a potential indication as to where we are in our movement through the real estate cycle.” So as the effective rents are approaching face rents, Hamilton said, it might be a sign that the marketplace is stronger or is expected to be stronger a year from now. Conversely, if the differential between face rents and effective rents starts to widen, we may be reaching a peak in the market and entering a softening phase. “We’re looking at these two in tandem with each other to not only get a direction on rent, but really what is the strength of that rent in the marketplace,” said Hamilton.

So what’s next for the Index? Hamilton says: “Over time, what we’re hoping to have the ability to look at where people were thinking we would be 12 months ago and compare it to the actual position where we are today.” NAIOP eventually plans to have data sortable by product type (office industrial, retail and multifamily) and NCREIF Regions (East, West, Midwest, South).

Listen to the full webinar with PowerPoint presentation.

View the Spring 2016 Sentiment Index report at

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