Real estate economists predict markedly improved U.S. economic and property market conditions over the next three years, 2021 to 2023, compared with the forecast of six months ago, according to the spring ULI Real Estate Economic Forecast.
This is not surprising given what has transpired since October 2020—the successful development and rollout of multiple COVID-19 vaccines, a partial reopening of the economy, generally strong gross domestic product and job growth reports, and trillions of dollars of stimulus and relief spending. Forecasters predict that the current recovery, which was kicked off by GDP rising by a record 33 percent (annualized) in the third quarter of 2020, will remain robust over the next three years. U.S. real estate market conditions and values are also forecast to perform much better than predicted six months ago, although wide differences by property types are expected to persist.
The Real Estate Economic Forecast, produced by the ULI Center for Real Estate Economics and Capital Markets, is based on a survey conducted in May of 42 economists and analysts at 39 leading real estate organizations. The forecast is based on the median responses gathered in the survey, which reflected a wide range of views, both better and worse.
While the fall 2020 Forecast was notable in its reversal of many of the pessimistic forecasts from spring 2020, the current forecast goes even further, with several forecasts now ahead of long-term averages. Among the 2021–2023 metrics predicted to outpace long-term averages are GDP and employment growth, the unemployment rate, real estate transaction volumes, warehouse and apartment occupancy and rent growth, and single-family housing starts and price appreciation.
Key Findings for Commercial Real Estate
U.S. real estate transaction volumes are predicted to increase to $500 billion in 2021, up from the actual $427 billion in 2020, and to $550 billion in 2022 and $590 billion in 2023, all well above the long-term annual average of $347 million. Commercial mortgage–backed securities (CMBS) debt is expected to be generally available, as indicated by the projected issuance of $70 billion of CMBS in 2021, up from $59 billion last year. CMBS issuance is predicted to rise to $90 billion in 2023, close to the recent peak of $98 billion in 2019. Although not covered by the survey, other forms of debt are also expected to be generally accessible, although lenders are cautious regarding retail and hotel properties.
Commercial real estate prices as measured by the Real Capital Analytics (RCA) Commercial Property Price Index are projected to rise by 4.2 percent in 2021, and by 5.0 percent in 2022 and 2023. The index rose by 5.2 percent in 2020, a very successful outcome given that the spring 2020 survey predicted a 7 percent decline for the year.
Total returns from unleveraged core real estate (NCREIF Property Index) are estimated at 4.5 percent in 2021, up from the 3.0 percent predicted six months ago. Total returns are predicted to be 5.9 percent in 2022 and 6.5 percent in 2022. With an actual return of 1.6 in 2020, private real estate returns weathered the COVID-19 downturn with positive total returns throughout, a much better performance than during the global financial crisis of 2007–2008.
As has been the case for several years, returns are expected to vary widely across property types. Average returns over the 2021–2023 forecast period are predicted to range from 9.8 percent for industrial to 2.5 percent for retail, with apartments at 6.3 percent and office at 3.6 percent. Returns for equity real estate investment trusts (REITs) are forecast to be 15 percent in 2021 (up from –8.0 percent last year), 8.0 percent in 2022, and 7.0 percent in 2023.
The COVID downturn affected the five major property types in differing ways, with recovery paths also expected to vary.
Hotels were hit hardest but are forecast to improve the most, with the average occupancy rate increasing to 54.7 percent in 2021 from 44.1 percent in 2020 (but well below the 2019 level of 66.0 percent). Industrial/warehouse availability experienced little impact from the COVID-19 recession, with availability forecast to remain unchanged at 7.4 percent in 2020 and 2021, before slightly decreasing in 2022 and 2023.
Apartment performance will be similar to that of industrial, with little change in the vacancy rate over the forecast period, although expensive urban markets such as New York City and San Francisco have reportedly weakened while suburban and Sun Belt markets have improved over the past year or so.
The availability rate for neighborhood and community retail centers is forecast to rise 60 basis points to 10.0 percent in 2021 and improve slightly (9.8 percent) by 2022. The fall forecast had the retail availability rate at 11.3 percent in 2022, indicative of a rebound in retail leasing.
Office vacancy rates are predicted to rise more than rates for other property types in 2021, following a weak 2020. Vacancy rates will rise 150 basis points to 16.5 percent in 2021 after rising 280 basis points in 2020. The office vacancy rate is forecast to exceed its long-term average (14.3 percent) over the entire forecast period.
As has been the case for several years, industrial is predicted to lead all property types in rent growth over the forecast period, averaging 3.6 percent per year from 2021 to 2023. Apartment rent growth will average 2.6 percent, whereas office and retail rent growth will be slightly negative. For hotels—which track revenue per available room (RevPAR), combining rental rates and occupancy—growth will average 19.9 percent over the next three years, bouncing back from a 47.4 percent decline in 2020.
The single-family housing sector continues to strengthen. Economists are forecasting that 1.1 million new houses will be started in 2021, compared with a predicted 940,000 units just six months ago, with 1.2 million new starts predicted for 2022 and 2023. Home prices rose by 11.4 percent in 2020, the fastest rate since 1979. Home price growth is forecast to average 8.1 percent in 2021, 5.0 percent in 2022, and 4.0 percent in 2023—all close to or above the long-term average of 4.1 percent.
Key Findings for Major Economic Indicators
U.S. GDP is forecast to rise by 6.5 percent this year, much better than the 3.6 percent rate predicted in the fall forecast, and if achieved, the fastest growth rate since 1984. Continued GDP growth is expected in 2022 and 2023, with forecast increases of 3.9 percent and 2.5 percent, respectively, both well above the long-term average of 1.7 percent.
The economy is expected to gain a net 5.5 million jobs during 2021, a partial recovery from the 9.4 million jobs lost in 2020. Job growth will remain well above the long-term average of 500,000, with net increases of 3.0 million in 2022 and 2.1 million in 2023.
The forecast calls for the U.S. unemployment rate to end 2021 at 5.0 percent, down from 6.7 percent in 2020. The unemployment rate is predicted to decline to 4.1 percent by the end of 2022 and 4.0 percent at the end of 2023, below the long-term average of 5.9 percent but still above the 2019 level of 3.6 percent.
Inflation and interest rate expectations have moved up materially over the past six months, not surprising given the high levels of stimulus spending and resulting GDP growth. Yields on the 10-year U.S. Treasury note are expected to rise to 1.95 percent by year-end 2021 (they were 1.64 percent as of May 14), and 2.23 percent in 2022 and 2.5 percent 2023. Six months ago, forecasts for the Treasury note were 1.0 percent for 2021 and 1.5 percent for 2022.
Inflation is now in the news for the first time in several years. The current ULI forecast for inflation in 2021 is 2.8 percent, up from 2.0 percent just six month ago. The rise in the Consumer Price Index is expected to hit 2.5 percent in 2022 and 2.3 percent in 2023, above the 20-year average of 2.1 percent.
The spring survey reflects much good news about the response to the pandemic-induced recession, including medical breakthroughs and a very robust government response. Unlike during the global financial crisis, capital markets stayed functional throughout the downturn, keeping asset values—including for real estate—from falling. Although there likely will be varying and long-lasting impacts in different sectors of the economy, areas of the country, and property types within the real estate industry, real estate economists are predicting that, overall, the United States will recover from this downturn more quickly than they—or almost anyone—thought possible six months ago.
WILLIAM MAHER is director, strategy and research, at RCLCO. Join other ULI members to hear a live discussion of the latest ULI forecast.