Real estate economists’ outlook on the U.S. economy has improved over the past six months as economic data remain strong, and the long-predicted economic slowdown has failed to materialize. Responses to the latest semi-annual ULI Real Estate Economic Forecast survey, increasingly suggest a soft landing for the economy. In contrast, real estate market projections have declined as high-interest rates are expected to continue putting downward pressure on valuations and drag on performance in the near term.
The Spring 2024 survey continued the trend from six months ago as the timeline of the expected economic slowdown was pushed out again, and the downturn’s expected severity further moderated. GDP is forecast to grow 2.2 percent in 2024, notably higher than the Fall 2023 expectation of 0.9 percent and in line with historical averages. Economists no longer predict any year with less than one percent growth, with 2025 and 2026 GDP growth predicted at 1.7 percent and 2.0 percent, respectively. The same trend was evident in employment growth forecasts, with 2024 growth revised up from 1.0 million to 1.8 million and 2025 growth moderated down from 1.8 million to 1.5 million. 2026 job growth is forecast at an above-average level of 1.75 million.
Interest rate expectations were largely stable with survey respondents forecasting the 10-year treasury rate to end 2024 at 4.0 percent, equal to the Fall 2023 forecast. Rates are projected to fall to 3.75 percent in 2025, slightly lower than the Fall forecast of 3.9 percent. Economists project that elevated rates will have a larger and more prolonged impact on real estate markets than was expected six months ago. The MSCI Commercial Property Price Index (CPPI) is expected to decline more severely in 2024, and 2025 price increase expectations also fell. Negative valuation pressure is projected to drag down real estate returns. Respondents expect the NCREIF Property Index to return -3.8 percent in 2024 and 4.1 percent in 2025, down sharply from forecasts of 4.5 percent and 8.0 percent, respectively, six months ago.
The Spring 2024 edition of this semi-annual survey now includes forecasts for 2026, and many metrics are forecasted to be more favorable than long-term averages in 2026, including employment growth; CPI; unemployment; single-family starts; rent growth in industrial, apartments, and retail; availability rates in industrial and retail; and commercial real estate transaction volume. On the other hand, the ten-year U.S. Treasury rate will be above its long-term average, private real estate returns are expected to lag historical averages, and the office sector is projected to remain troubled.
The Real Estate Economic Forecast, produced by the ULI Center for Real Estate Economics and Capital Markets, is based on a survey conducted February 27 to March 16, 2024, of 39 economists and analysts at 34 leading real estate organizations. The forecast results are based on the median responses gathered in the survey, which reflect a wide range of views both better and worse.
Key Findings for Commercial Real Estate
Economists’ outlook for real estate markets deteriorated relative to Fall 2023 projections. Capital market constraints seem to have driven the less optimistic view as elevated interest rates coincided with downward pressure on valuations. The MSCI Commercial Property Price Index is projected to decline 5.0 percent in 2024 and increase just 2.0 percent in 2025 before recovering to 4.0 percent in 2026, near its long-term average. Six months ago, respondents expected a more moderate decline of 1.1 percent in 2024 followed by stronger growth of 4.1 percent in 2025. Lower appreciation will drag down returns. Private real estate returns for the NCREIF Property Index (NPI) of unleveraged core real estate are forecast to total -3.8 percent in 2024, a marked decline from the prior 4.5 percent forecast. Returns are expected to improve in 2025 but remain modest at 4.1 percent, barely over half of the 8.0 percent forecast in Fall 2023. Returns are projected to improve to 7.6% in 2026, still shy of the NPI’s long-term average.
Return forecasts declined across property types relative to six months ago. Retail return forecasts are the highest at an annual average of 4.6 percent. Retail returns benefit from earlier value write-downs in the sector which have resulted in higher yields. Industrial and apartment returns follow at 3.3 percent and 3.2 percent, respectively. Economists expect the office sector to remain challenged, averaging an annual return of -1.9 percent through 2026.
| Annual NPI Return Forecasts by Property Type | ||||
| | 2024 | 2025 | 2026 | Average |
| Apartment | -3.0% | 5.0% | 7.7% | 3.2% |
| Industrial | -2.0% | 5.0% | 7.0% | 3.3% |
| Retail | 2.4% | 5.1% | 6.2% | 4.6% |
| Office | -10.0% | 0.0% | 4.3% | -1.9% |
Source: “Real Estate Economic Forecast,” ULI Center for Capital Markets and Real Estate, Spring 2024.
In contrast, forecast returns of public real estate improved markedly. Respondents project the Nareit All Equity REITs index to return 9.3 percent in 2024 and 10.0 percent in 2025, well above the 0.0 percent and 5.0 percent returns, respectively, forecast in Fall 2023. REIT returns are projected to remain strong in 2026 at 8.0 percent.
Elevated interest rates are expected to continue pushing up capitalization rates. Economists expect the overall NPI cap rate to increase from 4.6 percent at year end 2023 to 4.8 percent in 2024 and 5.0 percent in 2025 before ticking down modestly to 4.9 percent in 2026. With the 10-year UST yield forecast at 3.63 percent in 2026, the resulting spread of 127 basis points is roughly half of its long-term average of 250 basis points but well above the 2023 spread of 70 basis points. Economists forecast that transaction volumes will slowly increase, rising from $410 billion, marginally below its long-term average, in 2024 to $550 billion in 2025 and $610 billion in 2026. In contrast, CMBS debt issuance is projected to remain low. Respondents forecast $45 billion of issuance in 2024 and $68 billion in 2025, both below projections from six months ago, and $88 in 2026, close to its long-term average.
Rent growth is expected to vary widely across property types. Economists’ forecasts declined from the prior survey for apartments, industrial, and office. Retail rent growth projections were up moderately. Industrial is expected to lead with an average annual growth rate of 3.7 percent, outpacing its historical average of 2.9 percent. Retail follows at 2.6 percent, outperforming its average growth rate of 1.3 percent. Apartment rent growth forecasts average 2.0 percent, trailing their 20-year average of 2.9 percent. Office is expected to continue lagging by a wide margin with rents contracting 1.1 percent annually.
Vacancy forecasts rose for industrial and office and fell for apartments and retail relative to Fall 2023 projections. Retail availability rates are expected to decline in each year of the forecast horizon, falling to 6.1 percent in 2026 from 6.5 percent currently. Industrial availability is projected to rise to 7.6 percent in 2024 and 2025, before falling to 7.1 percent in 2026 (all years below long-term average). Apartment vacancies are also projected to increase in 2024, rising to 5.9 percent before moderating to 5.8 percent in 2025 and 5.4 percent in 2026, still above long-term average. Office continues to suffer from weak demand as hybrid work increasingly becomes the norm. Vacancies are expected to increase to record highs of 19.9 percent in 2024 and 20.1 percent in 2025 before edging down slightly to 20.0 percent in 2026.
Hotel performance has largely stabilized after the tumult caused by the pandemic’s travel disruptions. Occupancies are projected to remain strong and increase slightly each year, rising from 63.9 percent in 2024 to 64.3 percent in 2025 and 64.5 percent in 2026. Revenue per Available Room (RevPAR), which combines rental rates and occupancy, is expected to rise by more than 3.6 percent each year from 2024 to 2026, below the long-term annual average of 5.4 percent.
Housing construction has been robust over the last several years, and real estate economists project single-family housing starts to remain elevated. Starts are projected to trend above their historical average of 890,00 and total 970,000 in 2024, up from the prior forecast, and increase to 1.0 million in 2025 and 1.1 million in 2026. After several years of elevated growth in average home prices, price increases are expected to moderate. Economists forecast a 4.0 percent increase in average home prices in 2024, double their projection of six months ago. Prices are expected to increase 3.8 percent in 2025 and another 4.0 percent in 2026.
Key Findings for Major Economic Indicators
The ULI Real Estate Economic Forecast’s Spring 2024 macroeconomic projections broadly improved relative to Fall 2023 forecasts. Economists continue to project a decline to below average growth but no longer forecast a broad slowdown. Annual GDP growth is expected to total 2.2 percent in 2024, close to its long-term average of 2.1 percent and well above the Fall 2023 projection of 0.9 percent. Growth is expected to slow to 1.7 percent in 2025, a slight downgrade from the 2.0 percent forecast six months ago. GDP growth is expected to hold steady in 2026 at 2.0 percent.
Employment growth forecasts followed a similar trend with the 2024 forecast revised up from 1.0 million to 1.8 million and 2025 projections brought down from 1.8 million to 1.5 million. Cumulative employment growth for 2024-25 rose to 3.3 million in the Spring survey, up from 2.8 million in the Fall. Job growth is expected to total 1.75 million in 2026. Economists correspondingly lowered forecasts for the unemployment rate which they project will rise to 4.0 percent in 2024 and 4.2 percent in 2025 before ticking down to 4.1 percent in 2026. Unemployment is expected to remain well below its long-term average of 5.7 percent across the forecast horizon. As of February 2024, the unemployment rate stood at 3.9 percent.
Survey respondents adjusted their forecasts for the Consumer Price Index (CPI) upward slightly. Inflation is expected to continue cooling but remain elevated at 2.8 percent in 2024 before falling further to 2.4 percent in 2025 and 2.3 percent in 2026. Survey participants expect the 10-year yield to remain high at 4.0 percent in 2024 before easing to 3.75 percent in 2025 and 3.63 percent in 2026.
Respondents to the Spring 2024 ULI Real Estate Economic Forecast upgraded their projections relative to Fall 2023 to reflect a stronger economy in 2024 followed by slightly slower growth in 2025 and 2026. Real estate market projections were less optimistic as capital market constraints are expected to exert downward pressure on valuations for longer than previously anticipated, dragging down return forecasts. Underlying real estate fundamentals are expected to remain healthy in most property types except office.
