Real estate economists predict continued improvement in the U.S. economy and property markets over the next three years, according to the fall 2021 ULI Real Estate Economic Forecast. While the forecast is generally positive, contributing economists downgraded economic growth and predicted significantly higher inflation during the forecast period (2021–2023) compared with the spring forecast.
Despite this negative adjustment, compared with six months ago, respondents lowered expected interest rates, upgraded rental growth and other market fundamentals, and raised returns from real estate. Assuming that these forecasts are reasonably accurate, they portend a solid three-year period for the real estate industry.
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The Real Estate Economic Forecast, produced by the ULI Center for Capital Markets and Real Estate, is based on a survey conducted from September 24 to October 9, 2021, of 49 economists and analysts at 36 leading real estate organizations. It should be noted that the forecast is based on the median responses gathered in the survey, which reflected a wide range of views both better and worse.
Real estate economists, like the equity markets, are forward looking, always trying to discount current market noise and discern mid- and long-term trends. Throughout the pandemic, survey respondents as a group have looked beyond the COVID-induced downturn and have factored in macro changes such as the increasing importance of logistics and the broad availability of capital for the sector. At the same time, many respondents have noted that forecasts are particularly challenging in an unprecedented economic environment like today’s.
Key Findings for Commercial Real Estate
U.S. real estate transaction volumes are predicted to increase to $515 billion in 2021, up from $453 billion in 2020, and to $600 billion in 2022 and 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 $80 billion of CMBS in 2021, up from $59 billion last year. CMBS issuance is predicted to rise to $95 billion in 2023, close to the recent peak of $98 billion in 2019. Though not covered by the survey, other forms of debt also are expected to be readily accessible at improved rates and terms compared with six months ago.
Commercial real estate prices as measured by the Real Capital Analytics (RCA) Commercial Property Price Index are projected to rise by 10 percent in 2021, 7 percent in 2022, and 6 percent 2023. The 10 percent rise this year is up from a forecast of 4.2 percent six months ago, and—if realized—would represent the second-highest annual increase of the past decade.
The forecast total return from unleveraged core real estate (NCREIF Property Index or NPI) is 8 percent in 2021, up from the 4.5 percent predicted six months ago. Given preliminary third-quarter return data from NCREIF, this forecast could be on the conservative side. Total returns are predicted to be to 7 percent in both 2022 and 2023, both up from the prior forecast. As has been the case for several years, returns will vary widely by property type. Average returns over the 2021–2023 forecast period will range from 12.5 percent for industrial to 3.3 percent for retail, with apartments at 7.4 percent and office at 4.5 percent. This continues the dominance of industrial in the NPItrailing five-year annualized returns are 14.6 percent for industrial, 5.7 percent for apartments, 5.2 percent for office, and 1.2 percent for retail. Returns for equity real estate investment trusts (REITs) are forecast at 27.8 percent in 2021 (up from 15 percent forecast in May) and 10 percent in 2022 and 2023, close to the long-term average of 11.3 percent.
Over the past six months, economists have gotten more bullish on market fundamental prospects for industrial, apartments, and retail, with a more bearish view on the office sector. Industrial/warehouse availability is predicted to decline to 6.2 percent in 2023, a full percentage point lower than predicted in the prior survey. Apartment vacancy will improve at a slower pace, with most of the improvement occurring this year, with vacancy falling to 4.2 percent in 2021 from 4.6 percent in 2020.
The availability rate for neighborhood and community centers is forecast to be 9.3 percent in 2021, a better outcome than the 10 percent forecast in spring 2021. The office sector will lag behind the other main property types since the Delta variant has slowed office reopenings and office tenants struggle with when and how often to require office attendance over the long run. Office vacancy rates will rise 200 basis points to 16.9 percent in 2021, after rising 270 basis points in 2020. The predicted office vacancy rate will exceed its long-term average (14.3 percent) over the entire forecast period. Prospects for the hotel recovery slipped slightly compared with six months ago, with the average occupancy rate increasing to 61.9 percent in 2023, down from 64.7 percent forecast last spring (but above the long-term average of 61.0 percent).
Industrial will lead all property types in rent growth over the forecast period, averaging 4.4 percent per year from 2021 to 2023. Three-year rent growth will average 4 percent for apartments, 1.2 percent for retail, and –0.2 percent for office. Hotel revenue per available room (revPAR), which combines rental rates and occupancy, will average 8.4 percent growth over the next three years, well above the long-term average of 0.3 percent.
The outlook for the single-family-housing sector improved over the past six months. Economists are forecasting that 1.1 million new houses will be started in 2021, compared with the 20-year average of just approaching 942,000, with 1.2 million new starts in 2022 and 2023. Average home prices will rise by 10.9 percent in 2021, up from a prediction of 8.1 percent last spring. Home prices will rise 6.4 percent in 2022 and 5 percent in 2023, both years above the long-term average of 4.1 percent.
Key Findings for Major Economic Indicators
The U.S. gross domestic product (GDP) is projected to grow by 5.7 percent in 2021, down from 6.5 percent forecast six months ago, as the Delta variant and supply-chain constraints have slowed growth. Continued GDP growth is expected in 2022 and 2023, with forecast increases of 4 percent and 2.5 percent, respectively, both well above the long-term average of 1.7 percent.
Economists predict that the economy will gain 6 million net new jobs during 2021, a partial recovery from the 9.4 million jobs lost in 2020. Job growth will remain well above the long-term annual average of 490,000, with increases of 3.7 million in 2022 and 2.2 million in 2023.
The forecast calls for the U.S. unemployment rate to end 2021 at 4.9 percent, down from 6.7 percent in 2020. The unemployment rate is predicted to decline to 4 percent and 3.8 percent by the end of 2022 and 2023, respectively, below the long-term average of 6 percent, but above the pre-COVID 2019 level of 3.6 percent.
As discussed above, expectations for inflation and interest rates have diverged materially over the past six months, suggesting that most survey respondents view the recent rise in inflation as transitory. Economists forecast that the Consumer Price Index (CPI) will rise 4.3 percent in 2021, up from 2.8 percent just six months ago. If achieved, 4.3 percent would be the highest annual rate of increase since 1990. CPI is expected to rise by 3 percent in 2022 and 2.4 percent in 2023, above the 20-year average of 2.1 percent. Moving in the opposite direction, the 10-year U.S. Treasury note is expected to yield 1.6 percent by year-end 2021, down from the 1.95 percent predicted six months ago. Rates will rise to 2 percent and 2.25 percent in 2022 and 2023, respectively, but remain comfortably below the long-term rate of 3.1 percent.
The ULI fall survey paints a picture of continued recovery from the COVID-induced downturn, with some revisions (both up and down) to the prior forecast that took place in May 2021. New factors that could be influencing near-term outlooks include the Delta variant, supply-chain disruptions, and a marked increase in headline inflation. Despite these new uncertainties, real estate economists believe that the next three years will be positive and productive ones for the U.S. economy, property markets, and investment returns.
WILLIAM MAHER is director, strategy and research, at RCLCO.
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