Projections for CRE

ULI reports that sales volume is expected to continue declining from $489 billion in 2016 to $450 billion in 2017 and 2018, and slip to $430 billion in 2019.

That said, the average volume of the 3-year forecast period is surpassed only by 2007, 2015, and 2016 levels, and remains well above the long-term average.

A similar drop is anticipated for CMBS issuance, which grew consistently from 2009 to $101 billion in 2015, then declined in 2016 to $76 billion. It is expected to maintain this level in 2017 while moderate increases, to $80 billion and $85 billion, are forecast for 2018 and 2019 respectively.

Commercial real estate prices are projected to grow at relatively subdued and slowing rates in the next three years, at 5% in 2017, 3.5% in 2018 and 3% in 2019. This is below the long-term average growth rate of 5.7%.

Institutional real estate assets are expected to provide total returns of 7% in 2017, moderating to 6% in 2018 and staying at that level in 2019. By property type, 2017 returns are expected to range from 9.8% for industrial to 6% for both office and apartments.

In 2019, returns are expected to range from 7.9% for industrial to 5.5% for apartments.

Availability and vacancy rates for industrial, office, and retail are expected to continue improving in 2017, but remain essentially flat in 2018 and 2019. The exception is the apartment sector — the vacancy rate for apartments slightly increased in 2016 from near historic lows in 2015, and is expected to rise once more in 2017 to 5.2%. The hotel sector's occupancy rate is expected to remain flat in 2017 and decline slightly in 2018 and 2019.

Commercial property rents are expected to continue rising through 2019 for all sectors, although at more subdued rates than in recent years. In 2017, rent increases in the four major property types will range from 4.6% for industrial to 2% for apartments. Rent increases in 2019 will range from 3% for industrial to 2% for retail, office, and apartments. Hotel RevPAR (revenue per available room) is expected to increase by 2.5% in 2017 and 2.4%in 2019.

Single-family housing starts are projected to increase from 781,500 units in 2016 to 920,000 units in 2019.

Macroeconomic Projections

ULI also looks at the US economy in its report. Here, it found that economists expect that the GDP growth rate is expected to rise to 2.3% in 2017 (up from 1.6% in 2016), and then rise to 2.6% in 2018 before slipping to 2%in 2019.

Employment growth is expected to moderate to 1.9 million jobs added in 2018 and 1.55 million jobs added in 2019, while the unemployment rate is expected to continue its seven-year decline, reaching 4.6% by the end of 2017 and 4.5% in 2018 before ticking back up to 4.6% by the end of 2019.

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WASHINGTON, DC–Moderate is the word that best describes almost every facet of commercial real estate growth in the coming years. Sales volume, CMBS issuance, prices — all are expected to perform respectably, even better than average. But performance will not meet the industry's high-water marks of recent years. This is according to a new three-year economic forecast from the Urban Land Institute Center for Capital Markets and Real Estate.

Overall, the survey results suggest restrained optimism, said ULI leader and survey participant William Maher, director of North American strategy and research at LaSalle Investment Management.

The economic forecast is a semi-annual outlook based on a survey of 53 industry economists and analysts representing 39 real estate investment, advisory, and research firms and organizations. This survey was conducted in March 2017.

It should be noted that the survey did predict greater job and income growth — an additional 2.2 million jobs are expected to be added in 2017, just slightly below the 2.24 million jobs added in 2016 — and that is a positive for US real estate markets, Maher said. However, he continued, “forecasters were reluctant to upgrade real estate fundamentals or returns. New supply in the pipeline along with higher interest rates are likely keeping real estate economists cautious, but more likely realistic as uncertainty about future growth remains a concern.”