Economists: Continued Declines in Real Estate Growth Rates

Commercial property transaction volume is likely to decline over the next three years, falling to $428 billion in 2018, reported the Urban Land Institute, Washington, D.C.

ULI’s semi-annual Real Estate Consensus Forecast surveyed 51 industry economists and analysts. It said signs point to “continued economic expansion over the next three years,” but at a slower pace than the last six years. 

“Compared to six months ago, survey respondents have also reduced their expectations about interest rates, housing starts and private real estate returns,” the forecast said. 

Commercial mortgage-backed securities issuance, which grew consistently since 2009 to $101 billion in 2015, will likely decline to $70 billion this year before resuming growth in 2017 and reaching $90 billion in 2018, the forecast said. 

“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,” said William Maher, director of North American Strategy and Research with LaSalle Investment Management. 

Maher called real estate markets “intricately tied” to the broader economy and capital markets, both of which are growing more slowly than earlier in the cycle. “It’s no surprise that the real estate market is following suit,” he said.

Despite less optimistic findings overall, the consensus forecast included a more positive outlook for the industrial sector, forecasting lower availability, higher rents and stronger returns. In addition, it found no expectations of a recession or major capital market decline in the near future.

Survey predictions by property type include:

Office–Both office vacancy rates and rental rate growth predictions are less optimistic than six months ago, ULI said. Office vacancy rates should decline from 13.1 percent in 2015 to 12.8 percent at year-end 2016 and then plateau in 2017 and 2018. Office rental growth rate should moderate from 2015 levels to 2.8 percent in 2016, 2.9 percent in 2017 and 2.2 percent in 2018.

Apartments–Survey respondents expect apartment rental growth to remain above the 2.8 percent 20-year average growth rate but moderate to 3.5 percent in 2016, 3.0 percent in 2017 and 2.9 percent in 2018. 

Retail–The forecast predicted “minimal or no change” for both retail availability and rental growth rates in 2016. But it said respondents expressed more pessimism for 2017 and 2018. Retail availability rates could decline from 10.8 percent in 2016 to 10.6 percent in 2017 then increase to 10.7 percent in 2018. 

Industrial/Warehouse–The consensus forecast grew more optimistic than six months ago for the industrial/warehouse sector. Availability rates could decline to 8.7 percent by year-end, then plateau at 8.6 percent in 2017 and 8.7 percent in 2018.