Mild caution is evident in the latest ULI survey of U.S. real estate economists. Compared with their analysis six months ago, real estate researchers are predicting slower economic growth, slipping real estate fundamentals, and lower returns from both the public and private markets. As was the case six months ago, no downturn is considered imminent, though global economies and markets remain fragile and volatile. These results are based on the semiannual “ULI Real Estate Consensus Forecast,” prepared by the ULI Center for Capital Markets and Real Estate and scheduled for release Wednesday, April 6. The survey was completed by 38 real estate economists in March 2016.

Among the highlights from the survey, which covers the 2016–2018 forecast period:

  • Growth in the U.S. gross domestic product (GDP) will be 2.2 percent this year and average the same rate over the next three years. The 2016 forecast is down 60 basis points from the forecast of six months ago and 80 basis points from the forecast of one year ago as U.S. and global growth has faltered and the decline in energy prices has hit that sector hard.
  • Net job growth should average 2.0 million per year through 2018, compared with a long-term average of 1.2 million. The job growth forecast is down sharply from 2.7 million in the previous update. The 2016 median forecast is 2.4 million, compared with actual job growth of 3.0 million and 2.7 million in 2014 and 2015, respectively.
  • The yield on the ten-year U.S. Treasury note will rise gradually over the next three years—to 2.4 percent in 2016, 2.8 percent in 2017, and 3.2 percent in 2018. The 2016 and 2017 forecasts are 40 and 50 basis points lower, respectively, than forecast of six months ago. Though lowered, they are still significantly higher than rates implied by the futures market.
  • The survey indicates that real estate transaction volumes peaked (for this cycle) in 2015 at $534 billion. The real estate economists predict that transaction volumes will gradually ease over the next three years, totaling $475 billion in 2018. The U.S. transaction market is definitely in flux: February 2016 transaction volumes fell precipitously from a year earlier.
  • One reason for more caution about transaction volumes is that expected commercial mortgage–backed securities (CMBS) issuance has been downgraded. Economists predict a decline to $85 billion in 2016 from $101 billion in 2015. New regulations taking effect later this year will impede new issuance even more: the 2017 forecast of $100 billion is down from the forecast of $140 billion as of last September. CMBS spreads have risen since the start of the year, partly due to lower base rates, but also as a reflection of concerns about economic growth and defaults.
  • Commercial real estate prices as measured by the Moody’s/Real Capital Analytics Index are projected to rise by 3.6 percent per year over the next three years, compared with a long-term average increase of 5.8 percent. This is a marked decline from both 2015 (a 12.7 percent rise) and the previous forecast, which predicted growth of 6.0 percent in 2016 and 4.5 percent in 2017. The most recent reading of this metric was –0.3 percent as of January 2016, the first monthly decline since 2010. The U.S. real estate market has experienced a tremendous rebound since the global financial crisis, so a slowdown is not unexpected.
  • Among the five major property types, the warehouse, office, and hotel sectors have similar expectations for grown in rents or revenue per available room (RevPAR), all averaging 3.4 to 3.6 percent for 2016–2018. Surprisingly, forecasts for office and apartment rent growth are higher than they were six months ago, with the other three property types looking less robust.
  • The NCREIF Property Index (core unleveraged properties) total returns should average 7.5 percent, below the long-term trend of 10.2 percent. The 2016 forecast of 8.1 percent is down from 9.0 percent last September and below the Pension Real Estate Association (PREA) Consensus Forecast of 8.5 percent.

Although the survey showed diminished expectations broadly, no major warning signs emerged. A few areas exist where there may be some downside to the forecasts. Predicted vacancy rates may be overly optimistic given current development pipelines. Over the next three years, vacancy rates are forecast to increase by only 0.7 percentage points for apartments and 0.1 percentage points for warehouse space, while falling 0.8 percentage points for offices and 0.5 percentage points for retail space. If demand slows, vacancy rates could rise for all property types, putting pressure on rents. Also, the headline inflation rate is forecast to move to 2.0 percent in 2017 and 2018 (from 0.7 percent in 2015), just under the 20-year average, but well below the 3 percent rate used in most acquisition underwriting.

The experts also may have been overly conservative in some areas. Equity real estate investment trust (REIT) returns, are forecast to average 6.7 percent from 2016 to 2018, up from 3.2 percent in 2015, but well below the 20-year average of 12.9 percent. Publicly traded real estate markets often anticipate the next up-cycle, so returns for 2017 or 2018 could be higher. Finally, the single-family housing outlook deteriorated over the past six months, with starts predicted to climb to 900,000 in 2018, below the long-term average of 1.0 million per year. Low interest rates and the aging of the millennial generation may lead to more homebuying and housing demand than forecast.

In summary, respondents to the March 2016 “Consensus Forecast” survey are clearly registering more concern about the growth of the U.S. real estate market. The good news is that real estate economists are calling for a gradual and orderly slowdown—much preferable to the boom-and-bust cycles of the past.

This is a video of a discussion of the forecast at the 2016 ULI Spring Meeting: