Everybody needs a crystal ball. While the future is unknowable, of course, commercial and residential builders still have to make a reasonable forecast of economic conditions to plan for the year ahead.
One useful report is the Urban Land Institute’s Real Estate Consensus Forecast. The Urban Land Institute is a well-respected nonprofit education and research organization supported by its 40,000 members. The most recent semi-annual survey was conducted in September and involved 51 leading real estate economists and analysts from 37 real estate investment, advisory and research firm. The most recent results were published in October and the next forecast will appear next April. Some highlights of the current national forecast:
- Continued economic expansion over the next three years but at a somewhat slower pace than the prior two years;
- Relatively high but declining commercial real estate volumes;
- Continued commercial price appreciation, rent growth and positive returns but at more subdued and decelerating rates;
- Better-than-average vacancy and occupancy rates, except for retail;
- Continued growth in single family housing starts but remaining at levels below the long-term average.
The outlook for inflation, interest rates and capitalization rates remain subdued too. For 2017, the consensus forecast is for 1.9% inflation, 2.2% 10-year Treasury yields and capitalization rates of 5.3% for institutional-quality real estate investments. Financing is a bright spot. Issuance of commercial mortgage-backed securities, a key source of financing for commercial real estate, will rebound in 2017 to $85 billion from $70 billion in 2016.
Apartments have been one of the hottest sectors with some of the strongest construction activity in recent years. But the forecast is for vacancy rates to rise in 2017 and 2018, albeit remain below the 20-year average. Apartment rental growth is expected to moderate too, though it will remain above the 20-year average growth rate of 2.8%.
Single-family housing experienced positive growth in starts for the fourth straight year in 2015. They are projected to increase to 793,500 this year and 837,000 in 2017 but still remain below the 20-year average. “The length of the current expansion may weigh on forecasters’ minds, as well as uncertainty about the upcoming presidential election and economic and political turmoil abroad,” says William Maher, director of North American strategy and research with LaSalle Investment Management, in a statement accompanying the ULI report. “U.S. real estate markets are intricately tied to the broader economy and capital markets, both of which are growing more slowly than earlier in the cycle. It is no surprise that the real estate market is following suit.”
The forecast noted these trends in commercial real estate:
- Office: Office vacancy rates are expected to decline to 12.8% in 2016 and then plateau in 2017. The office rental growth rate is expected to moderate to 2.8% in 2016 and 2.9% in 2017.
- Retail: Retail vacancy rates are forecast to decline from 10.8% in 2016 to 10.6% in 2017. Retail rental rates are expected to grow at 2% in 2016 and 1.6% in 2017.
- Industrial/warehouse: Vacancy rates are expected to fall to 8.7% at the end of 2016 and flatten to 8.6% in 2017. Survey results forecast rental-rate growth of 4.7% in 2016 and 4% in 2017.
- Hotels: Hotel occupancy rates are predicted to reach 65.5% in 2016 before inching down to 65.2% in 2017. Revenues per available room will grow 4% this year, but fall below the long-term average to 3.1% in 2017.
You can read the full report, here.