A new U.S. forecast from the Urban Land Institute and EY projects continued improvement for real estate capital markets and commercial real estate fundamentals. The latest findings reveal high expectations for growth in the housing sector, as well as improved confidence about commercial mortgage–backed securities (CMBS) issuance, existing single-family housing prices, and industrial-sector fundamentals when compared to responses from just six months ago.
The results are from the latest ULI/EY Real Estate Consensus Forecast, a semiannual survey of economists and analysts at 38 of the nation’s leading real estate organizations—the fourth in a series of polls initiated to gauge industry sentiment. The survey, conducted by the ULI Center for Capital Markets and Real Estate between August 27 and September 13, provides forecasts for broad economic indicators, real estate capital markets, property investment returns for four property types, and vacancy rates and rents for five property types, as well as housing starts and prices.
Among the forecast’s key findings:
- Commercial property sales volume is expected to increase from $299 billion in 2012 to $300 billion in 2013, before growing to $330 billion in 2014 and $350 billion in 2015.
- The issuance of CMBS, a key source of financing for commercial real estate, is projected to more than double over three years—jumping from $48 billion in 2012 to $75 billion this year, then rising to $88 billion in 2014 and $100 billion in 2015.
- Total returns for equity real estate investment trusts (REITs), tracked by the National Association of Real Estate Investment Trusts (NAREIT), are expected to drop dramatically, from 18.1 percent in 2012 to 4.0 percent this year, before recovering to a modest 8.0 percent in both 2014 and 2015.
Though the Moody’s/RCA Commercial Real Estate Property Index increased by 7.9 percent in 2012, a slower pace of growth is expected for the next three years—6.5 percent this year, 5.5 percent in 2014, and 5.0 percent in 2015. At the same time, returns for institutional-quality direct real estate investments are expected to trend lower than the 2012 rate of 10.5 percent. These returns, measured by the National Council of Real Estate Fiduciaries, are expected to yield returns of 8.5 percent this year, 8.8 percent in 2014, and 8.6 percent in 2015.
“According to this survey, real estate investors anticipate that the improving U.S. economy will continue to help strengthen real estate markets,” said Howard Roth, EY’s global real estate leader. “The results are truly promising for commercial real estate and housing sectors, showing increasing confidence going forward.”
During a ULI webinar on October 15, further analysis was provided by Richard Moody, senior vice president and chief economist at Regions Bank; Paul Mouchakkaa, global head of research and strategy at Morgan Stanley Real Estate Investing; and Tad Philipp, director of commercial real estate research at Moody’s.
Given the possibility of a U.S. default—averted since the webinar was held—much of the discussion focused on confidence and economic headwinds.
“I would probably revise my forecast downward from a month ago given what’s happening in Washington,” said Phillipp. “The shutdown has probably already taken a half a percent off the growth rate.”
“Confidence is really critical,” said Moody. “If you think about where we were coming out of the recession, household and corporate balance sheets are in good shape. We could see growth pick up smartly if we remove some of this uncertainty.”
“I do think what’s happening outside of the U.S., in terms of Europe and slower growth in China, is also having an impact on business confidence,” added Mouchakkaa.
Continued Improvements in the Economy and Housing Sector
The findings of the forecast indicate an expectation of overall economic improvement over the next three years. According to the forecast, U.S. gross domestic product (GDP) will grow by 1.9 percent this year, 2.6 percent in 2014, and 2.9 percent in 2015. The outlook on jobs is positive, with respondents expecting the unemployment rate to fall to 7.2 percent by the end of this year, 6.8 percent at the end of 2014, and 6.3 percent at the end of 2015. This reflects the report’s expectation that 2.2 million jobs will be created this year, followed by 2.4 million in 2014 and 2.6 million in 2015.
According to the forecast, ten-year Treasury rates will rise to 3.0 percent by the end of this year, followed by a rise to 3.4 percent for 2014 and 4.0 percent for 2015. These higher rates will increase borrowing costs for real estate investors; however, survey respondents do not expect substantial increases in real estate capitalization rates for institutional-quality investments, which are expected to remain at 5.8 percent this year, before rising to 6.0 percent in 2014 and 6.3 percent in 2015.
A continued rally is expected for the housing sector, with forecasters projecting a strong ending to 2013 and continued growth in 2014 and 2015. Single-family housing starts, which were at half-century lows between 2009 and 2011, ended 2012 at 535,300 units. Forecasters predict that these numbers will continue rising and reach 675,000 units for this year, 800,000 units in 2014, and 900,000 units in 2015.
Changing Fundamentals by Property Type
The forecast anticipates higher rents for all four major commercial property sectors this year, with projected increases ranging from 0.2 percent for retail to 3.3 percent for industrial. Rents increases in 2015 are predicted to range between 2.0 and 4.0 percent.
Vacancy rates are expected to decrease modestly for both office and retail properties. Office vacancy rates, which remained at 16.5 percent in 2009 and 2010, began to decline in 2011 and 2012. These declines are expected to continue over the next three years, with rates falling to 15.0 percent by the end of this year, 14.4 percent for 2014, and 13.8 percent for 2015. For office properties, rental rates are expected to continue strengthening, increasing by 2.0 percent this year, 3.1 percent in 2014, and 4.0 percent in 2015.
Compared with the Consensus Forecast from six months ago, the recent findings show a modest increase in optimism for retail availability rates. After six years of increases, investors saw retail availability rates decline in 2012. The findings project continued improvements over the next three years, with the expectation that rates will decline to 12.2 percent by the end of this year, 11.8 percent for 2014, and 11.5 percent for 2015. For retail rental rates, after five years of declines, the forecast sees rates inching up by 0.2 percent this year, and by 2.0 percent in both 2014 and 2015.
The outlook for the industrial/warehouse sector continues to brighten, with expectations of continued decreases in vacancy rates. More optimistic than in the April forecast, respondents expect the vacancy rate to fall from its 2012 level of 12.7 percent to 11.8 percent by the end of this year, before declining further to 11.3 percent for 2014 and 10.8 percent for 2015. Warehouse rental rates, which experienced substantial declines in 2009 and 2010 before rebounding slightly in 2012, are expected to rise to 3.3 percent by the end of this year, 3.5 percent for 2014, and 3.2 percent for 2015.
In the apartment sector, which has performed well over the past two years, vacancy rates are expected to decline to 4.9 percent by the end of this year, before rising to 5.2 percent for 2015. In addition, though apartments rental rates are expected to continue climbing, this growth is expected to slow from the jump of the last two years—rising 2.7 percent this year, before moderating to 2.6 percent in both 2014 and 2015 as new supply hits the market.
Hotel occupancy rates are expected to improve over the next three years. The forecast shows higher expectations for the sector, with projections that occupancy rates will continue to increase, rising to 62.0 percent by the end of this year before inching up to 62.6 percent for 2014. By the end of 2015, rates are expected to increase to 63.1 percent, a projection that is just shy of the pre-recession peak of 63.2 percent in 2006.
The ULI/EY Real Estate Consensus Forecast reflects consensus reached on 27 economic and real estate indicators; the forecast for each indicator is the median forecast from the 38 survey respondents. The next semiannual forecast is slated to be released in April 2014.
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