Real estate economists continue to have a positive outlook for the U.S. economy, capital markets, and real estate fundamentals through 2021. Since the previous forecast six months ago, the United States and the world have been buffeted by trade disputes and increased tariffs, stock market volatility, and reduced global growth prospects. But these events have had little or no impact on medium-term economic and real estate market expectations. Although key real estate metrics such as rent growth and returns are expected to moderate, the surveyed economists predict no major disruption to the current real estate expansion.

These results are based on the survey for the semiannual “ULI Real Estate Economic Forecast,” prepared by the ULI Center for Capital Markets and Real Estate. The survey was completed in April 2019 by 45 economists/analysts at 33 leading real estate organizations.

The forecast will be discussed during a ULI webinar May 1. ULI members can view the report and learn more about the session on the forecast that took place at the 2019 Spring Meeting in Knowledge Finder.

Despite stock and bond market volatility in late 2018 and increasing global trade and growth concerns, the April 2019 “ULI Real Estate Economic Forecast” was surprisingly consistent with the previous forecast, released in October 2018. Overall, expectations for 2019 and 2020 are flat to up, while the newly introduced forecast for 2021 calls for slower growth and returns. Moderating growth in gross domestic product (GDP) and jobs for 2019 to 2021 should lead to slower but still positive real estate demand and absorption. Expectations for the real estate market are modest, and the sector is relatively well prepared for slower economic growth, if it occurs.

Among the highlights from the survey, which covers the 2019–2021 forecast period, are:

  • U.S. GDP will grow by 2.3 percent in 2019, down from 2.9 percent in 2018. GDP growth is projected to moderate further to 1.8 percent in 2020 and 2021. The average forecast for the next three years is below the 20-year average GDP growth rate of 2.2 percent, but continued growth past June 2019 will be remarkable for being the longest economic expansion recorded in U.S. history.
  • Net job growth should average 1.6 million per year through 2021, compared with a long-term average of 1.1 million. Expected job growth of 2.1 million in 2019 and 1.4 million in 2020 is up from the previous forecast. The U.S. economy has created 20.5 million jobs (2.3 million per year) from 2010 to 2018, one of the strongest stretches ever. The national unemployment rate is forecast to remain at its current level of 3.8 percent in 2019, approximating the lowest rate of the past 50 years, but move up to 4.3 percent in 2021.
  • Expected yields on the 10-year U.S. Treasury note fell meaningfully compared with those of six months ago for both 2019 and 2020, following recent market movements. Forecast year-end yields are 2.8 percent and 2.9 percent, respectively, in those years, with the 2021 forecast staying flat at 2.9 percent. The 2020 forecast of 2.9 percent is down 60 basis points from the previous forecast, and well below the 20-year average of 3.5 percent.
  • Real estate transaction volumes rebounded in 2018 and are predicted to stay at high levels throughout the forecast period. The final 2018 volume of $562 billion was the second-highest level since the global financial crisis and was up 15 percent over 2017. Economists predict transaction volumes of $535 billion in 2019 and $500 billion and 2020, both meaningfully higher than previous estimates. Recent and expected transaction levels are well ahead of the long-term average of $327 billion, as equity and debt capital is readily available for most real estate investments. Expectations for CMBS issuance (commercial mortgage–backed securities) fell somewhat but are close to the long-term average of $80 billion.
  • Commercial real estate price growth as measured by the Moody’s/RCA Commercial Property Price Index (CPPI) is projected to moderate over the next three years (5.0 percent, 3.7 percent, and 2.8 percent, respectively), after averaging 7.7 percent over the past three years. If the forecast holds true, 2021 will mark the 11th year of real estate price appreciation.
  • Rent growth expectations for 2019 and 2020 rose for industrial, office, and multifamily properties compared with the fall forecast, although the newly introduced 2021 forecast calls for moderating growth. Industrial rent growth will lead all property types with 2019–2021 growth averaging 3.1 percent, followed by apartments (2.4 percent), hotels (1.8 percent growth in revenue per available room [RevPAR]), office (1.7 percent), and retail (1.2 percent).
  • Over the next three years, national vacancy or availability rates are forecast to rise modestly for all property types, though generally less than indicated by the previous forecast. The apartment vacancy rate will increase to 4.9 percent in 2021 from 4.5 percent at year-end 2018. Industrial availability will be 7.1 percent in 2021, only 10 basis points higher than in 2018 and well below the long-term average of 10.2 percent. The office vacancy rate will increase by 40 basis points over the next three years, ending 2021 at 13.0 percent. Finally, retail availability will finish 2021 at 9.4 percent, a 40-basis-point increase over 2018.
  • Forecast returns as measured by the NCREIF Property Index (NPI), which tracks core unleveraged institutional properties, are flat compared with the previous update and suggest a soft landing for real estate values. Total returns are forecast at 6.0 percent, 5.0 percent, and 5.0 percent for 2019, 2020, and 2021, respectively, after returns were 6.7 percent for 2018. Industrial will continue as the strongest property type, with an average total return of 8.4 percent through 2021, compared with 5.3 percent for the overall index. Returns will average 5.5 percent for apartments, 5.2 percent for office, and 3.0 percent for retail through 2021. Regional malls in the NPI produced a 0 percent total return in 2018 and are likely to continue to underperform in the near term.
  • Real estate economists continue to be cautious about equity REIT returns (real estate investment trust), though return expectations have improved compared with the fall forecast. The NAREIT composite is forecast to average 5.7 percent from 2019 to 2021, well below the 20-year average of 11.5 percent. U.S. REITs are up by 12 percent year to date as of April 23, 2019, so the 2019 forecast of 6.0 percent looks achievable. The current ULI forecast predicts seven years (2015–2021) of underperformance relative to long-term average returns.
  • The single-family housing construction outlook weakened slightly over the past six months, with starts forecast to rise from 871,000 in 2018 to 900,000 and 888,000 units in 2019 and 2020, respectively, before slipping to 850,000 units in 2020. Expected construction in all years is below the long-term annual average of 974,000 homes, but is well above the average since the financial crisis.
  • Home price growth is forecast to average 3.3 percent over the next three years, 60 basis points lower than the long-term average but comfortably above predicted inflation.