You might feel like every successful developer has a crystal ball with the ability to peek two or three years into the future and understand what a community will need. In reality, of course, there is no crystal ball. Instead, there are metrics and data (and a little bit of luck) to forecast trends that help developers deliver relevant properties, meet demand, and fulfill the needs of a community. Still, the constant analysis of the market gives developers a steady sense of market needs, trends and momentum. As a result, developer sentiment can play an important role in tracking and understanding the trajectory of new construction.
For the last two years, since interest rates began to rapidly rise, developer sentiment has tracked negatively across the major indices. This spring, that started to change. Both real estate developers and investor sentiment turned mildly optimistic, a positive sign for the industry.
A Brighter Outlook, Depending on Where You Look
The NAIOP CRE Sentiment Index is an industry gold standard in tracking developer and investor sentiment across asset classes. Like most indices, the index works on a 100-point scale, with anything falling below 50 points showing a negative outlook and anything above 50 points considered optimistic. In the spring, the index delivered a 52-point score, showing mild optimism. Developers seemed most optimistic about the performance of industrial and multifamily properties. Overall, developers and owners expect deal volumes to grow, better capital costs and availability, and improving market fundamentals over the next 12 months.
The NAIOP survey is popular, but it includes forecasts from both developers and investors, who might have differing long-term outlooks. The National Association of Home Builders/Wells Fargo Housing Market Index, which tracks developer sentiment more closely, also showed improved optimism with developer sentiment rising to 51 points. Of course, this index is limited to residential outlook, rather than gauging sentiment across asset classes. In addition, NAHB also conducts a multifamily-specific survey. There, the results were less bright, with multifamily development sentiment scoring 47, meaning that developers remain pessimistic about the long-term outlook for multifamily development.
New Construction Starts Remain Volatile
The mild optimism has yet to show up in the construction pipeline. New construction starts have remained stale this year. In February, Dodge Construction Network reported that new starts fell 8% year-over-year, driven by commercial projects. The report highlighted high interest rates and “restrictive” credit standards as the main cause of the decline. After more bad news in March, construction activity began to brighten, with new construction gaining momentum in the spring. In April, new construction starts grew 6%, driven largely by nine mega projects to break ground across the country, including the $3.7 billion UC Davis Medical Center in Sacramento, California; the $1.8 billion Linde Blue Hydrogen plant in Beaumont, Texas; and the $1 billion Scout Motors electric vehicle plant in Blythewood, South Carolina.
Richard Branch, the chief economist of the Dodge Construction Network said the strong month was indicative of the renewed market optimism. “Overall here, a pretty decent month and it continues to show that despite high interest rates, owners and developers feel reasonably confident about the state of the economy and use demand for construction projects,” he said.
Construction Costs Remain the Biggest Challenge
The reason for the tepid, or even pessimistic, view is not due to demand fundamentals. Across the board, developers expect strong occupancy, effective rent growth and healthy employment in most asset classes, with specific positivity for industrial, multifamily, data centers, and retail. Plus, NAHB’s Multifamily Occupancy Index showed a score of 83—strongly optimistic. However, developers remain concerned about the high cost of construction and how it can erode already narrow profit margins. In NAIOP’s survey, participants responded positively in every category except construction costs, which they expect to increase in the next year. For both labor and construction costs, sentiment ranked only 42 points. This is unchanged from the last three surveys.
The sentiment has tracked reality. Last year, construction costs increased 4%, and this year, experts expect costs to increase by as much as 6%. The cost increases have made it difficult to launch and deliver new projects while preserving profits. Some developers are waiting on the sidelines in anticipation that costs will come down or that there will be relief in other areas, like the cost and availability of capital. Forward-looking developers are utilizing new tools to create efficiencies and optimize project performance to save costs and offset increased construction pricing.
Modern real estate development software like Northspyre is making that possible. By tracking construction budgets and spending, using predictive analytics to anticipate market movements and changes, and delivering financial forecasts, the technology empowers your team to accomplish more with less. It helps developers trim budgets, reduce overages, and deliver projects on schedule, all of which help to drive profitability and performance. The savings is significant enough to make up for rising costs, allowing developers to move forward on opportunities rather than waiting on the sidelines. That is truly a competitive advantage.
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