Real Estate Consensus
Forecast Based on
Survey of 39 Leading Economists, Analysts at Leading Real Estate
Organizations
For more information, contact: Robert Krueger at 202-624-7051
WASHINGTON (April 1, 2014) –
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:
- Apartments – The Consensus Forecast expects end of year vacancy rates to rise slightly to 5 percent in 2014, 5.2 percent in 2015, and 5.3 percent in 2016. Apartment rental growth rate, which slowed in 2013 after two years of significant growth, is expected to slightly increase in 2014 to 2.7 percent and then moderate to 2.3 percent in 2015 and 2.2 in 2016.
- Industrial/warehouse – Decreases in the industrial/warehouse sector are expected to continue but at a slower pace. Vacancy rates are projected to go from 11.3 percent in 2013 to 10.7 percent in 2014, 10.3 percent in 2015, and 10.1 percent by the end of 2016. According to CBRE, the sector’s rental growth rate was strong in 2013 at 3.6 percent. The Consensus Forecast projects continued growth of 3.8 percent in 2014 and 3.7 percent in 2015 before moderating to 3.0 percent in 2016.
- Office – Office vacancy rates declined for the third straight year to 14.9 percent in 2013 and are expected to continue at the same pace, decreasing to 14.3 percent in 2014, 13.7 percent in 2015, and 13.1 percent by the end of 2016. Survey respondents foresee a healthy and continued growth in office rental rates through 2016. According to the Consensus Forecast, office rental rates will increase by 3 percent in 2014, 3.9 percent in 2015, and 3.6 percent in 2016.
- Retail – Retail availability rates decreased in 2013; however, the Consensus Forecast anticipates modest improvements over the next three years, with availability rates expected to decline to 11.5 percent by 2014, 11.1 percent by 2015, and 10.8 percent by 2016. CBRE reported a decline in retail rental rates for the past six year; however, survey respondents foresee a turn-around in 2014 with rental rates increasing by 1.9 percent, 2.5 percent in 2015, and 3 percent 2016.
- Hotel – Hotel occupancy rates are expected to continue their steady improvement, with the 2016 projection surpassing the pre-recession peak in 2006. The Consensus Forecast projects that hotel occupancy rates will continue to strengthen, rising to 63.1 percent in 2014, 63.6 percent in 2015, and 63.8 percent by 2016. The strong growth in hotel revenue per available room (RevPAR) of the last four years is expected to continue, remaining above the long-term average annual growth rate but decelerating, with growth of 5 percent in 2014, 4.7 percent in 2015, and 4 percent in 2016.
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.
Source: Urban Land
Institute
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