Though real estate economists have tempered their view on economic growth over the past six months, they continue to forecast positive growth in gross domestic product (GDP), slower but solid job growth, and steady real estate markets and returns through 2021, according to the latest ULI survey of real estate economists.
The economists hold these views despite the U.S. yield curve inverting (often a harbinger of a recession), an escalation of the U.S.-China trade dispute, and slowing economic growth in Europe, particularly in the United Kingdom and Germany. Despite these headwinds, the United States in July set a longevity record for economic expansion, exceeding 10 years for the first time since records were first kept. Forecasts through 2021 continue to be positive, indicating the current expansion will continue to set records. Consequently, real estate fundamentals should stay healthy, with returns to the asset class changing little over the forecast period.
These results are based on the semiannual “ULI Real Estate Economic Forecast,” prepared by the ULI Center for Capital Markets and Real Estate. The survey was completed in September 2019 by 41 economists/analysts at 32 leading real estate organizations.
Highlights from the survey, which covers 2019 to 2021, include:
- U.S. GDP will grow by 2.3 percent in 2019, down from 2.9 percent in 2018, but that forecast is unchanged from six months ago. GDP growth is projected to moderate to 1.7 percent and 1.9 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.
- Net job growth should average 1.7 million per year through 2021, compared with a long-term average of 1.1 million. Expected job growth of 2.2 million in 2019, 1.4 million in 2020, and 1.5 million in 2021 is up from the previous forecast. Many economists predict slower job growth as the number of skilled or qualified workers dwindles. The national unemployment rate is forecast to remain at its current level of 3.7 percent in 2019, the lowest rate of the past 50 years, but move up to 4.1 percent in 2021.
- Expected yields on the 10-year U.S. Treasury note fell for all forecast years compared with six months ago (and even more dramatically compared with one year ago), following recent market movements. Forecast year-end yields are 1.8 percent, 2.0 percent, and 2.3 percent from 2019 to 2021, respectively. The previous forecast (released in April 2019) projected 2.8 percent, 2.9 percent, and 2.9 percent, respectively, for those years, while the October, 2018 forecasts were 3.3 percent and 3.5 percent for 2019 and 2020. The decline of 150 basis points (bps) in the expected yield on the 10-year Treasury at the end of 2019 is a remarkable shift and should be positive for real estate values.
- Real estate transaction volumes will moderate over the forecast period after a strong 2018. The final 2018 volume of $579 billion, the second-highest level since the global financial crisis, will not be sustained, according to the forecast. Economists predict transaction volumes of $475 billion in 2019, $450 billion in 2020, and $415 billion in 2021, all down from previous forecasts. Recent data from Real Capital Analytics suggest that transactions may be slowing: U.S. real estate transactions fell sharply in July and August of this year. Despite this decline in deal flow, equity and debt capital is readily available for most real estate investments, with retail centers not anchored by supermarkets out of favor. Expectations for annual issuance of commercial mortgage–backed securities (CMBS) fell slightly and are just below 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 (5.1 percent, 4.0 percent, and 3.9 percent, respectively), after rising by 6.2 percent in 2018. CPPI forecasts are higher for all years (they were 5.0 percent, 3.7 percent, and 2.8 percent in the spring consensus) possibly due to lower interest rates.
- Rent growth expectations for the next three years rose or were flat for all property types, except for industrial properties and hotels, where rent forecasts fell. Despite this change, industrial rent growth will lead all property types with 2019–2021 growth averaging 3.0 percent, followed by apartments (2.5 percent), office space (2.1 percent), hotels (1.4 percent growth in revenue per available room [RevPAR]), and neighborhood and community center retail (1.3 percent). Retail continues to face headwinds from e-commerce growth and store closures, so rent growth would be a relatively positive outcome.
- 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 4.7 percent in 2021 from 4.4 percent at year-end 2018. Industrial availability will be 7.4 percent in 2021, 40 bps higher than in 2018 but well below the long-term average of 10.2 percent. The office vacancy rate will increase by 40 bps over the next three years, ending 2021 at 12.8 percent. Finally, retail availability will finish 2021 at 9.5 percent, a 50 bps increase over 2018.
- Forecast returns as measured by the National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index (NPI), which tracks core unleveraged institutional properties, are higher than in the previous update, likely due to continued economic growth with lower interest rates. Total returns are forecast at 6.0 percent, 5.2 percent, and 5.5 percent for 2019, 2020, and 2021, respectively, after posting a 6.7 percent return in 2018. Industrial will continue lead all property types, with an average total return of 8.7 percent through 2021, compared with 5.6 percent for the overall index. Returns of other property types will average 5.5 percent for apartments and office and 2.8 percent for retail through 2021. Regional malls in the NPI have produced negative appreciation for the first six months of 2019 and are likely to continue to underperform in the near term.
- Real estate economists have upgraded equity real estate investment trust (REIT) returns, following a very strong start to 2019. The National Association of Real Estate Investment Trusts (NAREIT) total return composite is forecast to average 9.8 percent from 2019 to 2021, up from a forecast of 5.7 percent in the spring. U.S. REITs are up by 28 percent year-to-date as of September, so the full-year forecast of 15 percent may be conservative.
- The single-family housing construction outlook weakened over the past six months; higher construction costs may be slowing demand. Unit starts are forecast to fall from 877,000 in 2018 to 850,000 in 2019, 810,000 in 2020, and 800,000 in 2021. Expected construction in all years is below the long-term annual average of 975,000 homes, and would mark the first decline in deliveries since the global financial crisis. Home price growth is forecast to average 3.2 percent over the next three years, 70 bps less than the long-term average but comfortably above predicted inflation.
In summary, the main takeaway from the September 2019 “ULI Real Estate Economic Forecast” is that contributing economists see no end to the current record-setting economic and real estate expansion that started in 2010. Economic growth, including GDP and job growth, is forecast to moderate from the strong levels of 2018, which should keep long-term interest rates low.
Real estate fundamentals and returns, which slowed several years earlier this cycle, should stay steady through 2021. Retail will likely be an outlier as restructuring weighs on the sector for several more years. Major economic and political events are likely to continue in the United States and throughout the world over the next several years. The U.S. real estate market has been resilient to past changes, and the current forecast calls for that trend to continue.