While the growth of e-commerce and the shifting needs for open and smaller office spaces are having a marginal impact, most of these disruptive forces are still years away from having a substantive negative impact on the retail, office, and other industry sectors, said panelists discussing the latest ULI Real Estate Consensus Forecast during a webinar. While each sector faces its own challenges, “real estate remains an attractive play,” said K.C. Conway, senior vice president of credit risk management for SunTrust Bank.

The forecast, which polled 53 economists and analysts, reflected a distinct “restrained optimism,” ULI leader and survey participant William Maher, director of North American strategy and research at LaSalle Investment Management, noted in a statement. Despite concerns, most markets will continue to grow at a moderate rate for the next two years, respondents said.

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The webinar, moderated by Tim Savage, senior managing economist for CBRE, reflected a similar mix of muted confidence. All three panelists noted that many sectors continue to perform above historic levels.


Savage brought up the state of the multifamily market, which some observers believe is headed into overbuilt territory in the wake of years of new construction. Vacancy rates rose to 4.9 percent in 2016 after hitting a historic low of 4.2 percent in 2015, according to CBRE data. The economists surveyed expect another uptick in 2017, to 5.2 percent, but that is still below long-term averages.

Current conditions do not reflect an overbuilt market, said Melissa Reagen, director of real estate and agricultural finance for MetLife. “Our studies really suggest no, not yet,” she said, adding, “‘Yet’ is the important part.”

The key is the millennials, who as a cohort have largely preferred renting over ownership. It has been assumed that sooner or later millennials will form households and move back to the suburbs as previous generations have. But that may take longer than people expect and, until then, rentals should be in demand, Reagen said.

“I think it is a longer time period than the next couple of years,” she said. “Overall, not overbuilt now—but seven, eight nine years from now, maybe.”

Some cities are seeing an overhang in multifamily housing supply, said Mary Ludgin, managing director and director of global investment research for the Heitman real estate investment management firm. But demand remains strong. Construction is “just not keeping up with population growth,” she said.

Most of the oversupply is in specific areas or in high-end apartments in urban centers. “There is more luxury product then there is immediate demand for,” she said.

Conway labeled the reports of an overbuilt apartment sector as premature. Other factors will influence the market beyond the tastes of the millennials, he noted. “It all boils down to job creation,” he said. “We still have capital that likes” multifamily deals, he said.

The Consensus Forecast survey found economists generally bullish on economic growth. The unemployment rate is expected to continue to fall, reaching 4.5 percent in 2018, thanks to continued, albeit slower, job growth. The new forecast predicts 2.3 percent real growth in gross domestic product in 2017 and 2.6 percent in 2018, up from 2.1 percent and 2.0 percent, respectively, predicted in the previous survey. But the new Consensus Forecast sees growth sliding back to 2.0 percent in 2019, suggesting respondents are still not convinced that economic expansion will continue in the long term.


The oft-reported demise of the retail sector was another topic tackled by the panelists. But they were not ready to sign on to the prevailing attitude that retail is in steep decline. “Store growth continues on a net basis,” Ludgin said.

The forecast found economists equally optimistic about the retail sector. Vacancy rates (see above) are expected to hold steady at about 10 percent for the next two years, while rental rate growth will decline from 2.7 percent to 2.0 percent in 2018—still above historic averages, the economists predict.

Though the panelists agreed that many elements of the retail sector will continue to struggle—in particular, certain suburban malls—others will see an uptick, especially as the link grows between retail and distribution space. Retail space can play a key role in solving the “last mile” issue.

“The store is just a way to deliver goods to people,” Ludgin said. “You may not need the same square footage, but the store is not dead. . . . It’s performing a somewhat different function than in the past.”

Retail space linked to services and entertainment space is still performing well, Conway said. “What we’re not seeing is addition of shop space,” he said. Suburban malls will have to deal with obsolete space, but many retail spaces will evolve, as we “see the convergence of retail and industrial into one,” he said.

Many online retailers, including Amazon, are starting to invest in brick-and-mortar space, Ludgin noted. And discount department stores “remain extremely viable and are still opening stores,” including chains like T.J. Maxx and Nordstrom Rack, which offer a value proposition. “As a nation, we still like department stores, and we still shop in them. It’s just that they are less in regional malls and more in open-air centers,” Ludgin said.

Centers focused on local interests and artisan wares are also performing well, Reagen added. “There is a huge shift in people wanting something different,” she said. “These are centers that will remain viable.”


The webinar discussion also focused on the trend of shrinking office space, which is affecting both developers and landlords. Though there is no doubt that offices are downsizing, the trend is due to plateau in the years ahead, panelists agreed.

Whereas 280 square feet (26 sq m) per employee was once common for office space, more typical these days is 180 square feet (17 sq m), Conway said. “Will it go to 90 [8 sq m]? Absolutely not,” he said. He believes 140 square feet (13 sq m) per employee “is probably the floor.”

Retrofitting to accommodate extreme density can cost more than $100 per square foot ($1,076 per sq m], which will discourage many companies from radically altering their basic philosophy. “The economics don’t make sense,” Conway said.

Many companies “recognize they may have gone a little too far” in adopting smaller offices and more common space, Ludgin said. The struggle to find and retain employees will liberalize policies, she believes. “In a competitive labor market, it makes sense to throw more space at people,” she said.

Additional Commentary from Panelists William Maher