A new U.S. real estate forecast based on a survey of 39 of the industry's leading economists and analysts predicts that commercial property transaction volume will reach $430 billion by 2016, exceeding the volume of 2006. The latest multi-year outlook (covering 2014 through 2016) from the Urban Land Institute (ULI) and EY projects steady growth for the U.S. economy; sustained strength from real estate capital markets; and continued improvement in both commercial real estate fundamentals and the housing sector.
The findings were released today in the semi-annual ULI/E&Y Real Estate Consensus Forecast, prepared by the ULI Center for Capital Markets and Real Estate. The survey, conducted between February 19 and March 14, 2014, is the fifth in a series of polls conducted to gauge sentiment among economists and analysts about the direction of the real estate industry.
The latest forecast is more optimistic than the previous one from October 2014. Although survey respondents moderated their expectations for the housing sector – the latest forecast projects housing starts will remain below the twenty-year annual average through 2016 -- the overall industry outlook remains positive. The issuance of commercial mortgage-backed securities (CMBS), a key source of financing for commercial real estate, is expected to continue its rebound with consistent growth through 2016. Hotel occupancy rates are expected to continue improving, while vacancy rates are expected to decrease modestly for office, retail, and industrial properties. In addition, the forecast expects a turn-around in 2014 with retail rental rates, turning positive for the first time since 2007.
"Respondents to the Consensus Forecast survey project consistent growth in the real estate industry, bringing some key factors back to pre-recession levels and others moderating to long-term averages," said Anita Kramer, vice president, ULI Center for Capital Markets and Real Estate. "Fundamentals beyond multi-family continue to improve with the retail sector now joining in. This overall outlook for real estate is supported by expected on-going improvements in the economy."
Howard Roth, global real estate leader for EY, commented, "Although we've made significant improvement over the past year, the recovery has been uneven globally and many risks still exist, including high global unemployment, high government debt, deflationary pressure in advanced economies, weak domestic demand, capital flow volatility in emerging markets and the potential impact from Fed tapering in the US. Still, all signs point to a continued gradual improvement in both the economy and real estate market fundamentals."
The Consensus Forecast expects the overall economy to continue expanding a rate equivalent to the 20-year average. Gross domestic product (GDP) is expected to grow by 2.8 percent in 2014 and then 3.0 percent in both 2015 and 2016. Survey respondents predict that employment will grow by over 7.5 million jobs in the next three years. The unemployment rate is expected to fall to 6.3 percent by the end of the year, 6.0 by the end of 2015, and 5.8 percent by the end of 2016.
Inflation is expected to grow by 1.9 percent in 2014, and then increase by 2.2 percent in 2015, followed by 2.5 percent in 2016. At the same time, ten-year treasury rates are projected to continue moving up, reaching 3.4 percent by the end of 2014, 4.0 percent by the end of 2015, and 4.4 percent by the end of 2016. Even though treasury rates will increase borrowing costs for real estate investors, survey respondents do not expect these changes to substantially impact real estate capitalization rates for institutional quality investments (NCREIF capitalization rates), which are expected to remain at 5.7 percent in 2014 and then rise to 5.9 percent in 2015 and 6.2 percent in 2016.
Prices and total returns for commercial real estate investments are projected to increase at moderate rates. Institutional real estate assets are expected to provide total returns of 9.4 percent in 2014, moderating slightly up to 8.5 percent by 2016. NCREIF total returns in 2014 are expected to be fairly consistent across property types with retail and industrial at 10 percent, followed by office and apartments at 9 percent. Total office returns are expected to remain at 9 percent by 2016, while retail, industrial, and apartments are all expected to moderate downward.
Housing Sector on a Positive Course
After single-family starts reached a half-century low of 430,600 starts in 2011, the housing sector experienced two years of positive growth with starts rising to 618,300 in 2013. According to the Consensus Forecast, starts are projected to increase to 742,500 in 2014, 850,000 in 2015, and 900,000 in 2016. However, despite this growth, the 2016 projection for housing starts remains below the twenty-year annual average. Still, the single-family housing sector is expected to experience solid gains through 2016, with expected increases in home prices that are above the long-term average. Home prices are projected to moderate but continue rising by 6 percent in 2014, 4.4 percent in 2015, and 4 percent in 2016.
Commercial Property Outlook
The Consensus Forecast survey findings, by commercial property type, are listed below:
The ULI/E&Y Real Estate Consensus Forecast reflects consensus reached on 27 economic and real estate indicators; the forecast for each indicator is the median forecast from the 39 survey respondents. The next forecast is scheduled for release during October 2014.
About the Urban Land Institute
The Urban Land Institute (www.uli.org) is a nonprofit education and research institute supported by its members. Its mission is to provide leadership in the responsible use of land and in sustaining and creating thriving communities worldwide. Established in 1936, the Institute has over 32,000 members representing all aspects of land use and development disciplines.
EY (www.ey.com) is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 152,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. For more information, please visit www.ey.com. EY is a client serving member of EY Limited located in the United States.
Source: Urban Land Institute