Economists: CRE Industry Stays Steady through 2019

A new three-year economic forecast from the Urban Land Institute (ULI) Center for Capital Markets and Real Estate predicts that the U.S. economy and commercial real estate industry are, in general, expected to experience moderate growth through much of 2019. The ULI Real Estate Consensus Forecast, a semi-annual outlook, is based on a survey of 53 of the industry’s top economists and analysts representing 39 of the country’s leading real estate investment, advisory, and research firms and organizations. The survey, conducted in March 2017, provides forecasts for broad economic indicators; real estate capital markets; property investment returns for four property types; vacancy and rental rates for five property types; and housing starts and prices.

The forecast projects healthy GDP (gross domestic product) growth; moderating employment growth; relatively high but moderating commercial real estate volumes; continued commercial price appreciation; rent growth; positive returns (but at lower rates); relatively stable vacancy/occupancy rates for all commercial real estate sectors; and continued growth in single-family housing starts.

While encouraging, the survey results suggest restrained optimism, said ULI leader and survey participant William Maher, director of North American strategy and research at LaSalle Investment Management. He noted that the latest survey of U.S. real estate economists showed a marked increase in expected economic measures, most likely due to President Trump’s proposals to reform the tax code, reduce regulatory burdens, and invest in infrastructure.

However, while greater job and income growth will be positive for U.S. real estate markets, forecasters were reluctant to upgrade real estate fundamentals or returns. New supply in the pipeline along with higher interest rates are likely keeping real estate economists cautious, but more likely realistic as uncertainty about future growth remains a concern, Maher noted.

Among the survey’s key findings for commercial real estate:

• Following a 2015 post-recession high of $547 billion in annual commercial real estate transaction volume, sales volume is expected to continue declining from $489 billion in 2016 to $450 billion in 2017 and 2018, and slip to $430 billion in 2019. Still, the average volume of the three-year forecast period is surpassed only by 2007, 2015, and 2016 levels, and remains well above the long-term average.
• A similar drop is anticipated for the issuance of commercial mortgage-backed securities (CMBS), a source of financing for commercial real estate. CMBS issuance grew consistently from 2009 to $101 billion in 2015, then declined in 2016 to $76 billion, a level it is expected to maintain 2017. Moderate increases, to $80 billion and $85 billion, are forecast for 2018 and 2019 respectively.
• Commercial real estate prices are projected to grow at relatively subdued and slowing rates in the next three years, at 5 percent in 2017, 3.5 percent in 2018, and 3 percent in 2019, all below the long-term (from 2001 through 2016) average growth rate of 5.7 percent.
• Institutional real estate assets are expected to provide total returns of 7 percent in 2017, moderating to 6 percent in 2018, and staying at that level in 2019. By property type, 2017 returns are expected to range from 9.8 percent for industrial to 6 percent for both office and apartments. In 2019, returns are expected to range from 7.9 percent for industrial to 5.5 percent for apartments.
• Availability and vacancy rates for three sectors (industrial, office, and retail) are expected to continue improving in 2017, but remain essentially flat in 2018 and 2019. The exception is the apartment sector—the vacancy rate for apartments slightly increased in 2016 from near historic lows in 2015, and is expected to rise once more in 2017 to 5.2 percent. The hotel sector’s occupancy rate is expected to remain flat in 2017 and decline slightly in 2018 and 2019.
• Commercial property rents are expected to continue rising through 2019 for all sectors, although at more subdued rates than in recent years. In 2017, rent increases in the four major property types will range from 4.6 percent for industrial to 2 percent for apartments. Rent increases in 2019 will range from 3 percent for industrial to 2 percent for retail, office, and apartments. Hotel RevPAR (revenue per available room) is expected to increase by 2.5 percent in 2017 and 2.4 percent in 2019.