The latest survey of U.S. real estate economists shows continued declines in expected economic and real estate growth rates. Compared with six months ago, real estate economists have reduced their expectations about economic growth, interest rates, commercial mortgage–backed securities (CMBS) issuance, housing starts, and private real estate returns. One area of greater optimism is the industrial sector, with forecasts of lower availability and higher rents and returns. As was the case six and 12 months ago, there is no recession or major capital market decline in the near future. These results are based on the semiannual ULI Real Estate Consensus Forecast, prepared by the ULI Center for Capital Markets and Real Estate. The survey was completed by 51 real estate economists from 37 organizations from September 9 through October 3, 2016.
Some of the highlights from the survey, which covers year-end forecasts for 2016–2018, include the following:
- U.S. gross domestic product (GDP) will grow by 1.8 percent in 2016, a drop of 40 basis points (bps) since the last forecast and 100 bps over the past year. After averaging roughly 1 percent over the first two quarters of 2016, finishing the year at 1.8 percent implies a strong second half. The forecast for 2017 is down by 20 bps to 2.1 percent while the 2018 forecast is unchanged at 2 percent. While U.S. trend-line GDP growth was once 3 percent, the economy has not achieved that rate of growth since 2005.
- Net job growth should average 2 million per year through 2018, compared with a long-term average of 1.2 million. Compared with the last consensus forecast, expected job growth is down modestly in 2016 and 2017, but up in 2018. Overall, job growth has been one of the bright spots in the economy, and that is expected to continue.
- Expected yields on the ten-year U.S. Treasury note fell sharply in the most recent forecast, as interest rates fell in early 2016 and have stayed low throughout the year. The forecast year-end yield fell 60 bps to 1.8 percent for 2016, 60 bps to 2.2 percent in 2017, and 70 bps to 2.5 percent in 2018. The 2016 and 2017 forecasts are 100 bps and 110 bps lower than a year ago. The Federal Reserve has signaled moderate increases to short-term borrowing rates, but survey respondents think that long-term rates will stay very low.
- Based on the survey, real estate transaction volumes will fall by 13 percent in 2016 (to $475 billion) from this cycle’s 2015 peak of $545 billion. The 2016 forecast is down by $50 billion from the spring forecast. Transaction volumes will gradually decline modestly in 2017 and 2018, but remain well above the long-term average of $280 billion. Real Capital Analytics (RCA) reports that U.S. transactions are down 15 percent year-to-date as of August, with portfolio sales way down this year. Interestingly, cross-border investors have increased market share each of the past three years.
- Expectations for CMBS issuance continue to weaken. The consensus is for only $70 billion in new CMBS issuance in 2016, down from $101 billion in 2015 and a forecast of $85 billion six months ago. Uncertainty about new regulations taking effect later this year are chilling the market.
- Commercial real estate prices as measured by the Moody’s/RCA Index are projected to rise by 3.8 percent per year over the next three years (5 percent, 4 percent, and 2.5 percent, respectively), compared with a long-term average increase of 5.7 percent. This is a marked drop from 2015 (10.9 percent rise) but in line with the prior forecast. After essentially no growth in prices through April, commercial prices have rebounded. Through July 2016, the Commercial Property Price Index is up 7.7 percent over July 2015.
- The industrial sector should have the greatest rent growth over the next three years, averaging 3.8 percent. Industrial was also the only property type with a more optimistic forecast than six months ago. The growth of e-commerce is leading to very strong demand for industrial and warehouse space. Average rent growth rates (2016–2018) for the other major property types are 3.5 percent for apartments, 2.6 percent for office, and 1.6 percent for retail. These forecasts are flat or down from six months ago.
- Over the next three years, vacancy or availability rates are forecast to decline for all property types except apartments. Industrial availability will fall by 0.4 percent to 8.7 percent despite a healthy supply pipeline, a more optimistic outlook than six months ago. On the other hand, apartment vacancy will increase to 5.3 percent in 2018.
- Forecast returns as measured by the NCREIF Property Index (core unleveraged properties) are down slightly from earlier this year. Total returns should average 7.1 percent from 2016 to 2018, below the long-term trend of 10.2 percent. The forecasts for 2017 and 2018 are 7 percent and 6 percent, respectively, with the income yield rising to 5.5 percent in 2018 from 5.1 percent in 2015. Industrial should be the strongest property type, with an average total return of 8.5 percent through 2018.
- Expectations about equity real estate investment trust (REIT) returns are materially higher compared with those cited in the spring forecast, reflecting a strong start to 2016. The NAREIT composite is forecast to average 8.7 percent from 2016 to 2018, up from 3.2 percent in 2015, but well below the 20-year average of 12.9 percent. Year-to-date through October 14, U.S. REITs are up 8 percent, while the broader U.S. equity market (MSCI U.S. Equity) is ahead 6 percent. Like the private real estate market, industrial has been the strongest property type this year.
- The single-family housing outlook deteriorated over the past six months (and year), with starts climbing to 875,000 in 2018, below the long-term average of 1 million per year.
In summary, respondents to the October 2016 ULI Consensus have revised expectations down as economic growth continues at less-than-stellar levels. The length of the current expansion may weigh on forecasters’ minds, as well as uncertainty about the upcoming presidential election and economic and political turmoil abroad. U.S. real estate markets are intricately tied to the broader economy and capital markets, both of which are growing more slowly than earlier in the cycle. It is no surprise that the real estate market is following suit.