The Urban Land Institute held its semi-annual real estate economic forecast on Oct. 28 via webinar. Based on the opinions of more than 40 of the nation’s most respected economists and industry analysts, ULI’s forecast provides predictions for 27 economic and real estate indicators — including employment, GDP, housing prices, inflation, REIT returns, vacancy/occupancy rates and rents for five property types, and housing starts.
The Urban Land Institute 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.
Speakers at the event included:
- Richard Kleinman, managing director of research strategy, LaSalle Investment Management.
- Jeanette Rice, Americas head of multifamily research, CBRE.
- Tim Wang, managing director and head of investment research, Clarion Partners
- Adam Ruggiero, managing director, MetLife Investment Management.
The three-year forecast (2020 -2022) was a consensus forecast based on the median of the forecasts from 43 economists/analysts at 37 leading real estate organizations. Respondents represented major real estate investment, advisory, and research firms and organizations. The survey was completed Sept. 25– Oct. 9, 2020.
Some key finding included:
- Commercial real estate transaction volume reached $593 billion in 2019, a post-Great Financial Crisis peak. Volume is expected to be about 50% lower in 2020 with a forecast of $300 billion. Forecasts for 2021 and 2022 show growth again with transactions at $400 billion and $500 billion, respectively.
- Overall, commercial property prices are expected to drop by 2% in 2020, plateau in ‘21 and then resume growth in 2022 at a 4% growth rate.
- Institutional real estate assets are expected to provide total returns of -1.7% in 2020, but returns are forecast to turn positive in 2021 and 2022, at 3% and 5.6%, respectively. By property type, 2020 returns are forecast to range from industrial’s 4.5% to retail’s -9.9%. In 2022, returns are forecast to range from industrial’s 10% to retail’s 2%.
- Change in vacancy and availability rates differ widely by property type. In 2020, industrial availability is forecast to move up 50 basis points, while apartments are forecast to move up 100 basis points and both office and retail are forecast to move up 200 basis points. In 2021, industrial availability is expected to reverse direction and notch down slightly, apartment vacancy notches up slightly, and both office and retail vacancy rates continue to increase, albeit more moderately. In 2022, all sectors show slight improvement, with the exception of retail which remains unchanged over 2021.
- Commercial property rent growth differs widely by property type, as well. In 2020, industrial rent growth is forecast to be 1.0%, while apartments, office and retail are forecast at -2.5%, -2.4%, and -4.0%, respectively. In ‘21, both the industrial and multifamily sectors experience positive growth, at 2.1% and 0.1%, respectively, while office rental rate growth is -1.0% and retail is -2.8%. By ‘22, positive rental growth is forecast for all sectors ranging from 3.3% in the industrial sector to 1.9% in the office sector. The exception is the retail sector that plateaus in 2022.
Inflation, Interest, and Cap Rates
- The CPI inflation rate in 2019 was 2.3%, exceeding the 20-year average for the first time in 8 years. The forecast for 2020 is for low inflation at 1.3%, rising to 2.0% in 2021, and reaching the long-term average of 2.2% in 2022.
- The 10-year treasury rate has averaged 2.3% per year over the last nine years. It is expected to be unusually low in 2020, at 0.8%, rising only to 1.0% in ‘21, and 1.5% in 2022.
- Capitalization rates for institutional-quality investments (NCREIF cap rates) have steadily declined for 10 years, and were at 4.7% in ‘19. Cap rates are expected to remain low at 4.8% in all three forecast years.
Real Estate Capital Markets
- Commercial real estate transaction volume reached $593 billion in 2019, a post-Great Financial Crisis peak. Volume is expected to be about 50% lower in 2020 with a forecast of $300 billion. Forecasts for ‘21 and ’22 show growth to $400 billion and $500 billion, respectively.
- Issuance of commercial mortgage-backed securities (CMBS), a source of financing for commercial real estate, has rebounded since a low in 2009, but to a much lower level than pre-GFC levels (which peaked at $229 billion in 2007). The post-GFC peak was in 2019, at $98 billion. CMBS issuance is expected to fall by about half in 2020, with a forecast of $50 billion. Forecasts for 2021 and 2022 show growth to $60 billion and $83 billion, respectively.
Office Sector Fundamentals
- Office vacancy rates reached a post-recession low of 12.1% in 2019, below the 20-year average of 14%. Vacancy rates for 2020 are forecast to rise 200 basis points to 14.1% continue to rise another 100 basis points in 2021 to 15.1% before edging down 14.8% in 2022. Vacancy rates in all three forecast years are above the long-term average.
- Growth in office rental rates was strong in 2019, increasing 4.7%, well above the 20-year average of 1.5%. The forecast indicates a decline in office rents of -2.4% in 2020 and further decline of -1.0%. Growth will be positive in 2022 at 1.9%, above the long-term average.
Industrial/Warehouse Sector Fundamentals
- The availability rate for the industrial/warehouse sector declined for the ninth straight year in 2018, to 7.0%, before notching up to 7.2% in 2019, staying well-below the 20-year average of 10.2%. The forecast indicates only a 50 basis point increase in 2020, with slight declines in both subsequent forecast years, down to 7.3% in ‘22.
- Warehouse rental rate growth in the last seven years has been substantially above the long-term average of 1.1%. Rent growth in 2020 is expected to be 1.0% and 2.1% and 3.3%, respectively, in 2021 and 2022.