The numbers in the latest ULI Real Estate Consensus Forecast may show flat to lower growth in the next couple of years, but there is plenty of both risk and opportunity in the market, as panelists said during a 2016 ULI Fall Meeting session on the report.
“Economic growth in the United States is still happening,” contrary to the latest political rhetoric, said Jeanette Rice, head of investment research in the Americas for CBRE. “There is more strength than weaknesses.”
Gross domestic product (GDP) growth in the United States is expected to continue to hover around 2 percent, while unemployment will drop marginally, from 5 percent to 4.6 percent, by 2018, according to the survey. Job creation and property values will continue to grow, but at a slower place.
“Basically more of the same, but getting a little better,” said moderator Kenneth Rosen, chairman of the Rosen Consulting Group and chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley.
The panel discussion illustrated the diversity of opinion and forecasts in the market, as well as the perspective that the national data don’t always reflect what is happening around the country. Cities like Orlando, Dallas, and Seattle are growing well above the national average, at 3 and 4 percent a year, Rosen said.
“This is not a normal recovery, it’s an outright boom,” he said. “The idea that we have this sluggish economy is a politician’s dream.”
The conventional wisdom that “only the big areas are booming is completely wrong,” Rosen said. Secondary cities like Jacksonville, Florida; Boise, Idaho; Nashville; and San Antonio are all posting strong numbers.
“We have a lot of strength going on in the country,” he said.
But not all the panelists were ready to interpret the data as a sign of stability or predictable growth. The risk of GDP growing at only 1.8 or 2.0 percent is the danger of a “shock from within or outside,” said Mary Ludgin, director of global investment research for Heitman. “Something could push us into recession, because we just don’t have [any] margin for error.”
While the forecast data reflect the growth of the industry in recent years, “it’s never been a ‘feeling-good recovery,’ ” Ludgin said. “There’s always been something that causes a lurch in our stomachs that we all fear the global financial crisis has come back again.”
MetLife Investment Management is forecasting a 50 percent chance of recession next year, said Melissa Reagen, head of Real Estate and Ag Research. (To illustrate the range of opinion, Heitman’s estimate is a 12 percent chance of recession, Ludgin said.)
Stretching into the future, MetLife sees “growth continuing to slow,” while the chance of a recession continues to rise, Reagen said.
But Reagen also pointed to reasons for optimism in the real estate industry. “All the pools of money” for investment around the world continue to grow, she noted. “I wonder if that puts a floor underneath real estate prices,” she said. All indicators suggest that “real estate has some room to give,” she said.
Both major U.S. candidates for president promised to spend big on infrastructure, which “probably is a big positive for real estate,” Reagen said. Real estate will “look pretty good compared to other asset classes in that scenario,” she said.
Housing is slowly recovering and consumers are spending, which bode well for the overall economy, Rice said, adding that “2017 should be a solid year, even if growth is somewhat tepid.”
Some prognosticators are missing the big picture by focusing on GDP, according to Rosen. “As real estate people, I would almost ignore GDP numbers,” he said. “It is job creation in your local markets and submarkets that matters.” The GDP data often miss the productivity of the sharing economy and emerging technology services, he said. “The new economy is missing from a lot of [these] data,” Rosen said.
Net job growth is expected to average 2 million jobs per year through 2018, compared with a long-term average of 1.2 million, according to the consensus of the economists polled for ULI’s fall report. The expected job growth is down “modestly” in 2016 and 2017, but “job growth has been one of the bright spots in the economy, and that is expected to continue,” the forecast concluded.
Overall real estate transaction volumes are expected to fall by 13 percent to $475 billion in 2016, down from a peak of $545 billion in 2015, with continued declines in 2017 and 2018, the survey found. The industrial sector was forecast to show the highest rent growth over the next three years, at an average of 3.8 percent. Forecasts for other sectors are either flat or down from six months ago, according to the report.
Several unforeseen events could have an impact on the real estate market in the next few years, including a slowdown in China and uncertainty in Europe, post-Brexit, panelists agreed. A slowdown in the technology industry is one factor rarely discussed, Rice said. “We may have short-term disruptions,” she said.
Policies to limit immigration also may hurt real estate, with population growth a key driver for the industry, Rosen said. Any legislation that results in less immigration, “for real estate is not a good policy,” he said. Immigration accounts for half of population growth, he said. “For some of our high-growing areas, it is critical,” he said.
The complexity of the market was evidenced by the panelists’ diverse choice of sectors that might provide opportunities. Reagen singled out retail, which is out of favor these days, with e-commerce grabbing a larger share of the pie. “I actually think it presents the most opportunity, among the property types,” she said. “If you’re in the right property, right location, it is a big win ten years from now.”
Ludgin pointed to apartments, even though the forecast suggested that apartments may be in the decline, with vacancy rates growing.
“What I love about apartments is they no longer will be the darling” of the market, Ludgin said. Apartments are also a “defensive” play, if an economic downturn occurs. “You can always lease an apartment, it’s just a matter of the rate.”
It is possible to “manage your way through” a recession with apartments, which is more difficult with industrial space, which might “just sit empty” during a recession, Ludgin said. Industrial is “the brightest star right now,” she said, adding, “always be cautious of the brightest star.”
Rice pointed to office space as an opportunity. “Suburban office has a got a bad rap,” she said. “I think there is some great opportunity if you can sort through the maze.”
A member of the audience asked the panel what they thought the forecast got wrong.
Too often forecasters overstate the shift expected from millennials, Rice replied. “I always point out millennials are different, but they’re not that different,” she said.
Ludgin said that too much is being made of the “myth” that urbanizing is taking over the industry. “The light’s brighter there for sure, but not everybody is following the light,” she said.