Commercial real estate developers and property owners expect business conditions to worsen slightly during the next 12 months, according to the September sentiment index from the Commercial Real Estate Development Association (CREDA).

The twice-yearly sentiment index fell to 48 in September after measuring 52 in March. Any score below 50 signals respondents expect unfavorable conditions during the next 12 months. It was the first time the index had fallen below 50 since September 2023, when it measured 46.

Survey respondents have grown less optimistic about capital market conditions in recent months, saying they expect equity and debt to be slightly less available in the future and anticipate first-year capitalization rates will rise.

Developers and building owners were especially sour about the trajectory of interest rates during the next year. Scores for interest rates fell to 31 in the September index after reading a positive 52 in March. It was the largest decline between surveys since April 2022, when the survey coincided with the Federal Reserve shifting to a more restrictive monetary policy.

Respondents from the CRE sector also expect construction material prices and labor costs to rise more rapidly than they had expected in March, also reaching the highest level of pessimism in these categories since April 2022. The construction material costs index fell to 27 in September, down from an already negative 37 in March. The construction labor costs index hit a low of 30 in the latest survey, down from 35 in March.

“There are some headwinds that only time will fix,” commented one respondent, noting the link between oil price spikes from the Iran war and higher construction costs. Tariff threats impacting industrial leasing trends and the possibility of additional Fed rate hikes have injected “uncertainty that keeps equity on the sidelines,” they added.

On the positive side, survey respondents expect occupancy rates to increase and rents to grow more quickly than anticipated in March. They also expect an increase in the dollar volume of transactions and projects, and for employment in their firms to grow slightly in the next 12 months.

“This suggests that improving fundamentals may be enough to encourage expansion despite rising interest rates and construction costs, though this environment favors investments in stabilized properties over new development,” stated CREDA’s analysis of the survey results.

The score for general industry conditions — which is calculated separately from the overall sentiment index — was positive at 51. CREDA believes the higher score may reflect a more optimistic outlook for the performance of existing assets as opposed to future development projects. Alternatively, it may suggest that respondents have a favorable outlook for factors not measured in the index, such as general economic conditions.

As for property types survey respondents expect to be most active in during the next 12 months, 39.7% stated industrial, 19.7% said multifamily and 11.5% identified data centers. Retail was next at 9.7%, followed by office at 7.2% and mixed-use properties at 4.5%.