Survey of Experts Says CRE Growth to Slow, Return Stronger but in 2025

The Urban Land Institute released its semiannual real estate three-year economic forecast. Things will get worse before they get better, and they take until 2025 to return to normal.

The results are a consensus based on median forecasts from 41 economists and analysts at 37 major real estate organizations who were surveyed between April 10 and April 24, 2023.

CRE transaction volume is expected to drop significantly from 2022 figures, although that was the second-largest on record, so skews the sense of the comparison. In 2022, volume was $730 billion, second only to 2021’s $860 billion. The forecasts expected the 2023 figure will land at $425 billion, a 41.8% drop.

Prices are also expected to drop by 8%, the largest all-types decline since 2010, according to the ULI. That would likely account for some of the drop in transaction, volume as it is measured in dollars. Take 2022’s volume, reduce it by 8% to get expected 2023 pricing, and the starting point is about $672 billion. That would make the drop in constant dollars about 36.8%. A smaller fall, but still enormous.

Vacancies are expected to vary by property type. “Availability rates for neighborhood and community shopping centers, already at the lowest post-GFC rates and below their long-term average in ‘22, are expected to remain unchanged,” said the group. “Industrial availability rates are expected to inch up a bit but remain tight by historic standards.”

Multifamily vacancies will “inch up a bit” this year and then return to the long-term average by 2025. The forecast said that office vacancies will increase by 135 basis points in 2023 but then remain steady for the next few years.

“Commercial property rent growth differs by property type. Industrial rent growth is expected to be strongest in ‘23 at 6.2% and then plateau in subsequent years at a more moderate 4%. Annual apartment rent growth is forecast to average 2.8%, with a dip in ’24,” the report said. “Average annual retail rent growth is forecast at 2.1% with slightly stronger growth in ’23. Office rent growth is forecast at -2.8% in ‘23, -2.0% in ’24, and no change in ‘25.”

As for housing starts, after a decade of growth they reversed direction with the triple pressures of higher home values, increased interest rates that pushed up mortgage prices, and high costs of construction. This year will start 25% down from the peak of 2021 and drop below the long-term average. Positive growth will eventually come back in 2024 and 2025, eventually approaching, but not topping, the 2021 figures.