Real estate economists and analysts see strength in the U.S. economy over the next few years, which should translate into strong—albeit moderating—results for the commercial property sector.
The Urban Land Institute (ULI) presented the findings of its semi-annual economic forecast on Wednesday. The forecast was based on a survey of industry professionals, who were questioned on 27 economic and real estate indicators and represented 36 firms. It took place in March.
The survey respondents predict that this year U.S. GDP growth will reach 2.8 percent, up from the 2.3 percent growth seen last year. This is expected to moderate to 2.5 percent in 2019 and 2.0 percent in 2020. Meanwhile, survey respondents also predict that inflation will grow between 2.3 and 2.5 percent each year until 2020, and that the 10-year Treasury will move up to 3.1 this year, then plateau in 2019 and 2020 to 3.4 percent.
Richard Barkham, chief global economist at real estate services firm CBRE, who participated in a panel following the forecast’s presentation, said the consensus view of the survey was in line with CBRE’s prediction: that the economy will remain strong for the next couple of years. However, Barkham had a more pessimistic view for the market post-2019, expecting the global economy to slow more than the forecast suggests, given the high debt environment and rising interest rates.
For commercial real estate, the strong macroeconomic indicators—even if they are not quite as strong as they had been in previous recent years—signal that the sector should not experience a significant shift in the next few years.
For example, investment sales volume peaked in 2015 at $546 billion, but then began to drop. The respondents to the ULI survey believe that transaction volume will reach $450 billion this year and $425 billion in 2019—predictions that are higher than when the survey was last conducted six months ago.
However, respondents also project that transaction volume will continue to slide, hitting $408 billion in 2020. That figure would still be above the 17-year average of $303 billion. Pricing is also expected to grow by 5.0 percent this year, but at more moderate rates in 2019 and 2020, according to the Commercial Property Price Index (CPPI) put together Real Capital Analytics (RCA), a New York City-based research firm. The survey’s respondents forecast that CMBS issuance will rise slightly to $90 billion in 2018 and 2019, from $88 billion last year, but drop to $80 billion by 2020.
Panelist Diana Reid, executive vice president at PNC Financial Services, said there are good opportunities still at this late stage in the cycle. However, investors are stuck, given the flattening cap rates. She noted that it will be key to watch what will happen to the retail spaces that are being sold in bulk as weaker retailers liquidate their stores or downsize. “I think watching those transactions is going to be very interesting, to see at what prices those places go,” she noted.
The survey also tackled individual property sectors, and the winners and losers were clear to the respondents.
Industrial, once again, showed the most promise, with vacancy rates predicted to average 7.4 percent for this year. Though this is expected to increase slightly—to 7.5 percent next year and 7.7 percent in 2020—these figures are still below the 20-year average of 10.1 percent. This year the sector is expected to see the strongest NCREIF total returns, at 10.0 percent. That figure is anticipated to dip to 8.0 percent by 2020.
Retail remained on the bottom, with survey respondents predicting the lowest NCREIF total returns—5.0 percent in 2018, 4.6 percent in 2019 and 4.3 percent in 2020—among all property sectors. The 20-year NCREIF retail total return is 10.8 percent.
However, despite news of store closures, improved consumer sentiment has translated into better forecasts for the sector among the survey’s respondents. Vacancy rates are predicted to hit 9.8 percent this year and rise to 9.9 percent in 2019 and 10.0 percent in 2020. But rents are still forecast to rise 2.0 percent this year and 1.8 percent the year after.
Another panelist, Stuart Hoffman, senior vice president and senior economic advisor at PNC Financial Services, said he saw some concern on the horizon for the multifamily sector as well. He noted that millennials, starting to age and settle down, may turn to buying homes as housing prices are becoming more attractive. Meanwhile, multifamily developers continue to build a large quantity of new units. “We do have a lot of multifamily that’s been built and still in the pipeline,” he adds.
Returns in the apartment sector this year are forecasted to reach 5.4 percent—the same figure as office properties. The survey’s respondents predict this will drop to 4.5 percent for both property types by 2020.