A recent Urban Land Institute survey of 38 leading real estate economists and analysts from across the U.S. projects broad improvements for the nation’s economy, real estate capital markets, real estate fundamentals, and the housing industry through 2014.
The findings mark the start of a semi-annual survey of economists, the ULI Real Estate Consensus Forecast, being conducted by the ULI Center for Capital Markets and Real Estate. The survey results show reason for optimism throughout much of the real estate industry. Over the next three years:
- Commercial property transaction volume is expected to increase by nearly 50%
- Issuance of commercial mortgage-backed securities (CMBS) is expected to more than double
- Institutional real estate assets and real estate investment trusts (REITs) are expected to provide returns ranging from 8.5% to 11% annually
- Vacancy rates are expected to drop in a range of between 1.2 and 3.7 percentage points for office, retail, and industrial properties and remain stable at low levels for apartments; while hotel occupancy rates will likely rise
- Rents are expected to increase for all property types, with 2012 increases ranging from 0.8% for retail up to 5.0% for apartments
- Housing starts will nearly double by 2014, and home prices will begin to rise in 2013, with prices increasing by 3.5% in 2014
These strong projections are based on a promising outlook for the overall economy. The survey results show the real gross domestic product (GDP) is expected to rise steadily from 2.5% this year to 3% in 2013 to 3.2% by 2014; the nation’s unemployment rate is expected to fall to 8.0% in 2012, 7.5% in 2013, and 6.9% by 2014; and the number of jobs created is expected to rise from and expected 2 million in 2012 to 2.5 million in 2013 to 2.75 million in 2014.
The improving economy, however, will likely lead to higher inflation and interest rates, which will raise the cost of borrowing for consumers and investors. For 2012, 2013 and 2014, inflation as measured by the Consumer Price Index (CPI) is expected to be 2.4%, 2.8% and 3.0%, respectively; and ten-year treasury rates will rise along with inflation, with a rate of 2.4% projected for 2012, 3.1% for 2013, and 3.8% for 2014.
The survey, conducted during late February and early March, is a consensus view and reflects the median forecast for 26 economic indicators, including property transaction volumes and issuance of commercial mortgage-backed securities; property investment returns, vacancy rates and rents for several property sectors; and housing starts and home prices. Comparisons are made on a year-by-year basis from 2009, when the nation was in the throes of recession, through 2014.
While the ULI Real Estate Consensus Forecast suggests that economic growth will be steady rather than sporadic, it must be viewed within the context of numerous risk factors such as the continuing impact of Europe’s debt crisis; the impact of the upcoming presidential election in the U.S. and major elections overseas; and the complexities of tighter financial regulations in the U.S. and abroad, said ULI Chief Executive Officer Patrick L. Phillips. “While geopolitical and global economic events could change the forecast going forward, what we see in this survey is confidence that the U.S. real estate economy has weathered the brunt of the recent financial storm and is poised for significant improvement over the next three years. These results hold much promise for the real estate industry.”
The survey results suggest a marked increase in commercial real estate activity, with total transaction volume expected to rise from $250 billion in 2012 to $312 billion in 2014. CBMS issuance, a key source of financing for commercial real estate, is expected to jump from $40 billion in 2012 to $75 billion in 2014 (a considerable increase from the recession’s low point of $3 billion in 2009).
Total returns for equity REITs are expected to be 10% in 2012, 9% in 2013 and 8.5% in 2014, a sharp decrease from the surging REIT returns of 28% in both 2009 and 2010, but settling closer to the more sustainable level seen in 2011.Total returns for institutional-quality real estate assets, as measured by the National Council of Real Estate Investment Fiduciaries Property Index, have also been strong over the past two years and these returns are expected to remain healthy, providing returns of 11% in 2012, 9.5% in 2013, and 8.5% in 2014.
“Commercial real estate returns for institutional quality and REIT assets have performed very well in recent years, and this performance is expected to remain strong but trend lower over the next three years,” said Dean Schwanke, executive director of the ULI Center for Capital Markets and Real Estate.
A slight cooling trend in the apartment sector – the investors’ darling for the past two years – is seen in the survey results, with other property types projected to gain momentum over the next two years. By property type, total returns for institutional quality assets in 2012 are expected to be strongest for apartments, at 12.1%; followed by industrial, at 11.5%; office, at 10.8%; and retail, at 10%. By 2014, however, returns are expected to be strongest for office, at 10%, and industrial, at 10%; followed by apartments at 8.8% and retail at 8.5%.
- Apartments – The forecast predicts a modest increase in vacancy rates, from 5% this year to 5.1% in 2013 to 5.3% in 2014; and a decrease in rental growth rates, with rents expected to grow by 5% this year, and then moderate to a growth rate of 4.0% for 2013 and 3.8% by 2014. This may be indicative of supply catching up with demand.
- Office – The improved employment outlook is reflected in predictions for the office sector. Vacancy rates are expected to keep declining, reaching 15.4% in 2012, 14.4% in 2013, and 12.3% by the end of 2014. Office rental rates are expected to rise steadily, increasing 3.0% in 2012, 3.7% in 2013, and 4.3% in 2014.
- Retail – The strengthening economy is expected to boost the retail sector. Following years of rising vacancies, vacancy rates are expected to tighten to 13.0% by the end of 2012, 12.5% by 2013, and 12.0% by 2014. Retail rental rates are projected to rise by a slight 0.8% in 2012, and then increase more substantially in 2013 by 2%, and by 2.8% in 2014.
- Industrial/warehouse -- Vacancy rates are expected to continue declining to 12.8% by the end of 2012, 12.1% in 2013, and 11.5% by the end of 2014. Warehouse rental rates are expected to show growing strength, with an increase of 1.9% anticipated for 2012, 3.0% in 2013, and 3.6% in 2014.
For the housing industry, the survey results suggest that 2012 could mark the beginning of a turnaround – albeit a slow one. Single-family housing starts, which have been near record lows over the past three years, are projected to reach 500,000 in 2012, 660,000 in 2013, and 800,000 in 2014. The national average home price is expected to stop declining this year, and then rise by 2% in 2013 and by 3.5% in 2014. The overhang of foreclosed properties in markets hit hardest by the housing collapse will continue to affect the housing recovery in those markets. However, in general, improved job prospects and strengthening consumer confidence will likely bring buyers back to the housing market. BD+C
Related Stories
| Oct 29, 2013
Increased backlogs, margins lead to renewed optimism in global construction
After prolonged economic uncertainty, a majority of executives in the global engineering and construction sector have fresh confidence in the growth prospects for the industry, according to KPMG International's 2013 Global Construction Survey. A general increase in backlogs and margins is giving cause for optimism across the industry, with further growth anticipated.
| Oct 29, 2013
BIG opens subterranean Danish National Maritime Museum [slideshow]
BIG (Bjarke Ingels Group) has completed the Danish National Maritime Museum in Helsingør. By marrying the crucial historic elements with an innovative concept of galleries and way-finding, BIG’s renovation scheme reflects Denmark's historical and contemporary role as one of the world's leading maritime nations.
| Oct 28, 2013
Urban growth doesn’t have to destroy nature—it can work with it
Our collective desire to live in cities has never been stronger. According to the World Health Organization, 60% of the world’s population will live in a city by 2030. As urban populations swell, what people demand from their cities is evolving.
| Oct 28, 2013
Metal roofs are topping more urban dwellings
Given their durability and ease of use, metal roofs have been a common feature on rural houses for decades. Now they’re becoming an increasingly popular choice on urban dwellings as well.
| Oct 25, 2013
Hoffmann Architects announces launch of U.S. Capitol Dome restoration
The Architect of the Capitol will undertake comprehensive restoration of the 150-year-old cast iron Dome, which has not undergone a complete restoration since 1959-1960.
| Oct 23, 2013
AIA: Crowd-funding shows promise for financing real estate projects
The American Institute of Architects issued a statement on the SEC's recent 5-0 vote to propose rules aimed at letting startups tap large numbers of ordinary investors for small amounts of capital.
| Oct 23, 2013
Gehry, Foster join Battersea Power Station redevelopment
Norman Foster and Frank Gehry have been selected to design a retail section within the £8 billion redevelopment of Battersea Power Station in London.
| Oct 23, 2013
Some lesser-known benefits of metal buildings
While the durability of metal as a construction material is widely recognized, some of its other advantages are less commonly acknowledged and appreciated.
| Oct 23, 2013
Architecture Billings Index hits seven-month high in September
AIA's Architecture Billings Index was 54.3 in September, the highest level since February 2013
| Oct 18, 2013
Meet the winners of BD+C's $5,000 Vision U40 Competition
Fifteen teams competed last week in the first annual Vision U40 Competition at BD+C's Under 40 Leadership Summit in San Francisco. Here are the five winning teams, including the $3,000 grand prize honorees.
