619_cppiThe latest ULI Real Estate Consensus Forecast calls for relatively smooth sailing ahead as it relates to both continued economic growth and a favorable outlook for commercial real estate investment. Yet, the forecast is not as bullish as it was six months ago, and there are headwinds looming that are expected to temper growth heading into 2017.

The forecast, produced by the ULI Center for Capital Markets and Real Estate, predicts a healthy pace of economic expansion. Gross domestic product (GDP) growth for this year is expected to be on par with the 2.4 percent that was recorded in 2014, while strengthening to 2.8 percent in 2016 and 2.7 percent in 2017. It is notable that the forecast growth for 2016 and 2017 is at the highest levels in eight years, comparable with the 2.7 percent GDP growth that occurred in 2006.

Related: More on the ULI Real Estate Consensus Forecast

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“The U.S. economy is in a surprisingly good place, probably better than it feels to a lot of people. We’re just starting to shake out the doldrums and feel like we are going ahead. But at the same time, we are wondering how long this upcycle will last,” says Margaret Harbaugh, vice president at Morgan Stanley Real Estate Investing. Harbaugh was one of three industry panelists who participated in the webinar discussing the survey results.

Given the lessons learned in the last downturn, it is not surprising that industry panelists do have one eye out for red flags that might indicate a potential bubble forming on the horizon. “We are always looking for the turning signals,” says Steven Laposa, a webinar panelist and principal, Global Real Estate Knowledge Center, at Alvarez & Marsal in Denver. “What are the signals that we didn’t see in 2005, 2006, 2007 that may or may not be forming now?” he adds.

619_CMBSOverall, the outlook for the commercial real estate (CRE) sector remains bullish. The forecast included survey responses from 48 economists and analysts at 36 leading real estate organizations. All real estate indicators are forecast to be better than their 20-year averages in 2015, with the exception of four indicators expected to be worse—equity real estate investment trust (REIT) returns, retail availability rates, retail rental rate change, and single-family housing starts.

Among some of the notable CRE findings, CRE transaction volume remains robust, with continued price appreciation and positive returns. Commercial property transaction volume is expected to increase for another two years and then level off at $500 billion by 2017.

Rising treasury rates will increase borrowing costs for real estate investors. However, survey respondents do not expect it to substantially affect real estate capitalization rates for institutional-quality investments (NCREIF cap rates). In fact, cap rates are expected to decline slightly to 5.2 percent in 2015 and then rise to 5.3 percent in 2016 and 5.7 percent in 2017.

The forecast anticipates rising cap rates and rising asset values, which means that income growth also will need to be high to achieve that. Though possible, it may be a challenge to get the necessary net operating income (NOI) growth to support higher values, notes Andy McCulloch, webinar panelist and managing director, real estate research and analytics at Green Street Advisors. “If we were setting the betting line on asset value appreciation over the next couple of years, we would probably put it at zero, with NOI growth roughly offsetting a little bit of a backup in cap rates,” says McCulloch. Rather, he expects cap rates to rise with healthy, yet modest NOI growth given the improvements in fundamentals that have already occurred in the maturing stage of the market recovery.

The survey results predict that vacancy rates will continue to decrease modestly for office and retail over all three forecast years. Industrial availability rates and hotel occupancy rates are forecast to improve modestly in 2015 and essentially plateau in 2016 and 2017. Apartment vacancy rates also are expected to decline in 2015 before rising slightly in 2016 and 2017. Commercial property rents in all four sectors, as well as hotel revenue per available room (RevPAR), are all expected to rise over the next three years.

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Some of the favored property sectors in the near term among panelists include apartments, office, and manufactured housing. “Apartment has been defying expectations for two or three years now,” says Harbaugh. The demographics for apartments continue to remain compelling, with demand from millennials and baby boomers. There is more new construction, but that supply is getting absorbed due in part to new household formation.

Compared with six months ago, the forecast vacancy rates for apartments in 2015, 2016, and 2017 are lower, and the forecast rental rate changes are all higher. Apartments are expected to show consistent rental rate growth above the 20-year average of 2.7 percent, while rents are expected to rise by 4.6 percent in 2015, and then moderate to 3.5 percent in 2016 and 3.0 percent in 2017.

On the contrarian side, Laposa points to some of the potential risks of oversupply in the apartment sector in certain markets. “I have had a private equity firm already talk to me about how to develop an investment strategy as a vulture fund for apartments to be implemented in the next two years,” he says.

Certainly, some potential risks could rock the boat for both economic growth and performance within the commercial real estate sector. One threat is a shakeout in the technology sector, which has been a big driver for economic expansion. Second are geopolitical threats ranging from slower growth in China and Europe, as well as the looming presidential election in the United States.

Those factors may have influenced survey respondents, who are predicting slightly lower real estate returns in 2016 and 2017. Overall, returns based on the NCREIF Property Index have remained fairly steady the last three years between 10.5 percent and 11.8 percent. The ULI Forecast anticipates that returns will remain in this range in 2015 at 11.7 percent, and then trend lower—dipping below the long-term average returns—with returns of 9.0 percent in 2016 and 7.0 percent in 2017.

Despite the positive economic forecast, there are some worrisome signs with very low yields in both the corporate bond market and the REIT market, notes McCulloch. It has been pretty “rough sledding” in the REIT market, with major property sectors trading on average today at a 15 percent discount to net asset value (NAV), he says. “Why that’s important is if you look back over time, the REIT market has been a very good predictor of private market values,” he says. “So, the signals that we see for real estate values are getting more bearish.”