The new ULI Real Estate Consensus Forecast
, released March 28, projects three years of steadily improving conditions for the U.S. economy, and for the real estate industry in particular. Although analysts note that geopolitical and economic events could upset the forecast, they expect many sectors of the U.S. real estate economy to improve notably through 2014.
The survey of 38 leading economists and real estate analysts was conducted by the ULI Center for Capital Markets and Real Estate from February 23 to March 12. In a webcast announcing the results, Dean Schwanke, executive director of the center, described the forecast as “fairly optimistic,” but said lingering concerns remain. The new ULI survey will be conducted semiannually.
The webcast featured three ULI leaders who participated in the survey: Peter Linneman, principal of Linneman Associates and chief executive officer of American Land Fund in Philadelphia; David Lynn, managing director of Clarion Partners in New York City; and Kenneth Rosen, chairman of Rosen Consulting Group in Berkeley, California.
Concerns such as uncertainty over the presidential election, changes in tax policy, Europe's ongoing sovereign debt crisis, and threats to oil supplies from Iran translate into “much more risk of volatility,” said Linneman.
Survey respondents anticipate improvement in broad economic indicators. The median prediction of the 38 survey respondents is that real gross domestic product (GDP) will grow by 2.5 percent in 2012, 3 percent in 2013, and 3.2 percent in 2014. Unemployment is expected to fall to 8 percent by the end of 2012, 7.5 percent by the end of 2013, and 6.9 percent by the end of 2014. Employment may increase by 2 million jobs in 2012, 2.5 million in 2013, and 2.75 million in 2014.
One drawback of stronger growth is that both inflation and interest rates are predicted to increase, and the higher cost of borrowing will have a negative impact on the real estate recovery. Ten-year Treasury rates will rise with inflation, with projections of 2.4 percent Treasury rates by the end of 2012, 3.1 percent by the end of 2013, and 3.8 percent by the end of 2014.
The struggling housing sector is beginning to see a turnaround, with average home prices expected to stabilize in 2012, the survey said. Prices are forecast to increase by 2 percent in 2013 and by 3.5 percent in 2014. New construction starts, which were only 428,600 in 2011, are expected to increase steadily to 800,000 by 2014. Excess housing inventory is being absorbed, but “it's market by market,” said Lynn. “There are some higher-performing areas, and we don't really see this excess housing in New York, Boston, Seattle. It's more the Southeast and Southwest,” he said.
Schwanke noted that the news is better for commercial real estate investors. “Commercial real estate returns for institutional-quality and REIT assets have performed very well in recent years, and this performance is expected to remain strong but to moderate over the next three years.”
The survey respondents do not expect substantial increases in real estate capitalization rates for institutional-quality investments, which are expected to hold steady at 6 percent in 2012 and 2013 and rise slightly to 6.2 percent in 2014. This is a positive indicator for commercial real estate values.
Commercial real estate transaction volume is projected to rise from $211 billion in 2011 to $250 billion in 2012, $290 billion in 2013, and $312 billion in 2014. Issuance of commercial mortgage–backed securities (CMBS), a growing source of financing for commercial real estate, is also expected to increase markedly, from $33 billion in 2011 to $40 billion in 2012, $58 billion in 2013, and $75 billion in 2014.
Equity REITs are expected to exhibit higher returns than the 8.3 percent averaged in 2011, but still fall short of the very strong 28 percent returns experienced in 2009 and 2010. Survey respondents expect returns of 10 percent for 2012, 9 percent for 2013, and 8.5 percent for 2014. Returns for institutional-quality real estate assets are also expected to remain relatively strong but to trend lower in coming years, with returns of 11 percent forecast for 2012, 9.5 percent for 2013, and 8.5 percent for 2014.
The apartment sector remains strong, with total returns in 2012 expected to be 12.1 percent, but projected to trend lower to 8.8 percent for 2013. Conditions in the apartment sector remain favorable for investors: vacancy rates, which were at a very low rate of 5.2 percent in 2011, are forecast to decline further in 2012 to 5 percent. Vacancies are forecast to rise slightly to 5.1 percent in 2013 and 5.3 percent in 2014. Apartment rents are expected to show strong growth in 2012, rising by 5 percent, before moderating to 4 percent in 2013 and 3.8 percent in 2014.
Returns in 2012 for industrial properties are expected to reach 11.5 percent, followed by office at 10.8 percent, and retail at 10 percent. Survey respondents expect that, by 2013, returns will be strongest for office and industrial investments, both at 10 percent, followed by apartments at 8.8 percent and retail at 8.5 percent.
The industrial/warehouse sector will see slow but steady improvement, with vacancy rates declining to 12.8 percent by the end of 2012, 12.1 percent in 2013, and 11.5 percent by the end of 2014. Warehouse rental rates are expected to show gradual increases, gaining 1.9 percent in 2012, 3 percent in 2013, and 3.6 percent in 2014, according to the ULI Consensus Forecast
Analysts forecast that the office sector will improve markedly and steadily over the next three years. Vacancy rates are expected to decline from 16 percent at the end of 2011 to 15.4 percent in 2012, 14.4 percent in 2013, and 12.3 percent by the end of 2014. Office rental rates, which declined significantly in 2009 and 2010 and then rose by 3 percent in 2011, are also expected to show steady increases of 3 percent in 2012, 3.7 percent in 2013, and 4.3 percent in 2014.
Office space in high rises will continue to lag, said Rosen. The growing sectors of technology and new media are using office space in a much more efficient way, resulting in lower demand for space. “Let's not confuse job growth with office growth,” he cautioned.
The retail sector is expected to see a turnaround this year, with vacancy rates expected to decline to 13 percent by the end of 2012, 12.5 percent by 2013, and 12 percent by 2014. Retail rental rates, which have declined substantially since 2009, may rise by a modest 0.8 percent in 2012, followed by increases of 2 percent in 2013 and 2.8 percent in 2014.
The hotel sector will continue the improvement that began in 2010. Occupancy rates are expected to increase to 57 percent by the end of 2012, 58.2 percent by 2013, and 59.2 percent by 2014. Hotel revenue per available room will continue to improve, with growth projections of 6.6 percent in 2012, 6 percent in 2013, and 5.7 percent in 2014.
Listen to the archived webinar
. Speakers include Peter Linneman PH.D, David Lynn PH.D, Kenneth Rosen PH.D, and Dean Schwanke.