Significant improvement can be expected in both the commercial and residential real estate sectors this year and through 2015, according to a semiannual forecast from the Urban Land Institute.
The outlook, which represents the median consensus from a survey of 38 of the country’s top real estate economists and analysts, is “very optimistic,” said Howard Roth, global and Americas director of real estate at Ernst & Young—“considerably more so” than the previous ULI poll conducted in September, he noted.
Participants expect transaction volume in commercial real estate to rise steadily, from $290 billion last year to $310 billion this year, $340 billion in 2014, and $360 billion in 2015. Just four years ago, at the bottom of the recession, only $60 billion in commercial properties changed hands.
In what Dean Schwanke, ULI senior vice president, called another good sign, the issuance of commercial mortgage–backed securities (CMBS) is predicted to leap nearly 50 percent this year alone, to $70 billion from $48 billion in 2012. CMBS issuances, a key source of funding for income-producing properties, are expected to hit $80 billion next year and $100 billion the year after that. In 2009, only $3 billion in CMBS was issued.
Participants also are looking for strong growth in the housing sector through the remainder of this year and the next two. “This is where we see some of the most dramatic changes and lots of optimism,” Schwanke said during an hour-long press briefing.
The expectation is for 700,000 single-family housing starts this year, 900,000 in 2014, and 1.013 million in 2015. In comparison, just 535,000 houses were started last year. Also, prices are expected to rise 6 percent this year, 5.3 percent in 2014, and 5 percent in 2015.
These projections are based on a generally favorable outlook for the economy, with steady improvement anticipated in both growth and employment.
“When it comes to the economy, we see a lot of underlying strength,” said Suzanne Mulvee, director of retail research in CoStar Group’s property and portfolio research division in Boston and one of the survey participants.
“The economy really wants to go faster,” said Kevin Thorpe, chief economist at Cassidy Turley, a commercial real estate company in Washington, D.C. “Household balance sheets are very clean and ready to go forward,” added Craig Thomas, vice president of market research at AvalonBay Communities, a major apartment developer based in Arlington, Virginia.
Thorpe said about the only thing slowing growth is what he termed the federal government’s “fiscal instability.” Otherwise, he said, “we’re starting to morph into a really strong economy.”
According to the forecast, real gross domestic product can be expected to rise 2 percent this year, 3 percent next year, and 3.1 percent in 2015.
The unemployment rate is anticipated to fall to 7.5 percent by year’s end, slipping to 7 percent in 2014 and 6.5 percent in 2015. At the same time, the number of jobs created is expected to rise to 2.1 million this year, 2.4 million next year, and 2.6 million in 2015.
All these forecasts are more favorable than those in the September 2012 survey.
The participants do anticipate an increase in inflation and interest rates as the economy continues to improve.
But they expect total returns generated by equity real estate investment trusts to slide to less than half the 28 percent level reached in 2009–2010. As tracked by the National Association of Real Estate Investment Trusts, returns are expected to be 12 percent in 2013, 10 percent in 2014, and 8 percent in 2015. ULI’s Schwanke said the decline is only back “to historical norms.”
Total annual returns from institutional-quality direct real estate investments for all income properties combined are forecast to be 9.5 percent in 2013, 9 percent in 2014, and 8 percent in 2015. The downward trend began in 2012, but returns remain in the range of long-term historical averages.
“The survey suggests that the commercial real estate industry will be on solid footing for the next three years,” said Schwanke.
By property type, participants predict the following:
- Apartments: Vacancy rates will hold at 5 percent this year, then start to edge up to 5.2 percent through 2015. As more supply comes to market, rental rates will fall steadily from 4.1 percent last year to 3.8 percent this year, 3 percent in 2014, and 2.8 percent in 2015.
“We’ve been running at peak for the last couple of years,” said Thomas of AvalonBay. “Now we’re waiting for everybody else to join the party.”
- Office: The “bellwether sector is still at a high point, but it is coming down,” Schwanke said.
Vacancy rates are expected to fall to 14.8 percent in 2013, 14.1 percent in 2012, and 13.6 percent in 2015. Rental rates are forecast to fall by 3.5 percent this year, then rise by 4 percent in both 2014 and 2015.
- Industrial/warehouse: Vacancy rates will continue to decline, falling to 12.2 percent by year’s end, 11.7 percent in 2014, and 11.4 percent by year-end 2015. Rental rates will rise, with an increase of 2 percent expected this year and 3 percent in both 2014 and 2015.
- Hotel: Hotel occupancy rates, according to Smith Travel Research, have improved from 54.6% in 2009 to 61.4% in 2012, and the ULI Forecast projects that occupancy rates will increase to 62.4% in 2013, 63.1% by 2014, and 63.6% by 2015.
Hotel revenue per available room (RevPAR) has also grown substantially, with 8.2% growth in 2011 and 6.8% in 2012. Growth is expected to remain strong, but will grow at decelerating rate, with expected RevPAR growth of 5.5% in 2013, 5.0% in 2014, and 5.0% in 2015.
- Retail: Availability rates are forecast to dip to 12.5 percent this year, then to 12.2 percent in 2014 and 11.9 percent in 2015. Rental rates are projected to rise by 1 percent in 2013 and by 2 percent in 2014 and 2015.
But Mulvee of CoStar said the retail sector is “still going through a massive recession.” She noted that 50 million square feet of space has been vacated in malls nationwide as retailers consolidate and shut down, and 50 million square feet of additional space is likely to be chopped away this year and next. “It’s going to be a rough couple of years,” she said.
“Retail is the toughest sector to draw a clean trend on,” said economist Thorpe. “Downtown is looking good, but further from the core is where it gets iffy. Also, high- and low-end retail is doing very well, but the middle is very soft.”
This is the third in a series of polls by ULI to gauge the direction of the real estate industry, and the first cosponsored by Ernst & Young. The next installment is scheduled to be released in October.