Two recent reports are pointing to increased pessimism in parts of the CRE market, especially in the office, retail and hospitality sectors. The pair of reports cover architectural billings as well as the overall sentiment of participants in the CRE world.
However, other parts of the CRE sector, including multifamily and industrial warehouses seem to be holding up well, driven by more people abiding by Shelter in Place (SIP) and Working from Home (WFH) orders as well as increased online shopping, according to Hessam Nadji, CEO of Marcus & Millichap.
Architecture Billings Index
According to new data this week from The American Institute of Architects (AIA), demand for design services in April 2020 saw its biggest decline since the inception of its billings index.
AIA’s Architecture Billings Index (ABI) score of 29.5 for April reflects a decrease in design services provided by U.S. architecture firms (any number below 50 indicates a decrease in billings). During April, both the new project inquiries and design contracts scores also declined significantly, posting scores of 28.4 and 27.6 respectively.
“With the dramatic deceleration that we have seen in the economy since mid-March, it’s not surprising that businesses and households are waiting for signs of stability before proceeding with new facilities,” said AIA Chief Economist Kermit Baker, Hon. AIA, PhD. “Once business activity resumes, demand for design services should pick up fairly quickly. Unfortunately, the precipitous drop in demand for design services will have lasting consequences for some firms.”
Key ABI figures for April include:
- Regional averages: West (38.1); Midwest (31.2); South (31.1); Northeast (23.0)
- Sector index breakdown: institutional (36.1); multi-family residential (30.3); mixed practice (29.0); commercial/industrial (27.8)
- Project inquiries index: 28.4
- Design contracts index: 27.6
NAIOP’s Commercial Real Estate Industry Sentiment Index Plunges to Record Low
Meanwhile, NAIOP, a national trade association for commercial real estate developers, owners, investors and service providers, reported that it’s newly released NAIOP CRE Sentiment Index has dropped below 50 for the first time ever.
The NAIOP CRE Sentiment Index for March 2020 is 45, falling below 50 for the first time since the index began in 2016. It is a substantial drop from 57 in September 2019. A score below 50 indicates unfavorable conditions CRE conditions are expected in 12 months. The sentiment ratings for individual factors are identified in the chart below.
The average sentiment for employment, for example, dropped from 74 in September 2019 to 51 in March 2020, and the average sentiment for available equity and available debt also dropped sharply. However, the outlook for construction material costs and construction labor costs improved; this could signal that respondents believe there will be less demand in these areas due to a slowdown in the construction industry.
Respondents’ expectations about general industry conditions fell between the first seven days and the last eight days of the survey. Comments from survey respondents also suggest that sentiment had deteriorated since the survey first began in mid-March and that it had become more difficult to predict future industry conditions. The survey will be re-administered later this year.
A total of 439 distinct companies are represented in this survey. Product types owned/under development by respondents broke out to roughly 21% office, 50% industrial, 5% retail and 25% multifamily; western regions were slightly more represented than eastern regions, followed by the South and the Midwest.