Economists: ‘Moderate’ CRE Growth Through 2019

The U.S. economy and commercial real estate should experience “moderate” growth through 2019, said the Urban Land Institute, Washington. D.C.

The semi-annual ULI Real Estate Consensus Forecast surveyed 53 economists and analysts representing 39 real estate organizations. It predicted “healthy” GDP growth; relatively high but moderating commercial real estate volumes, continued commercial price appreciation and rent growth and positive returns–but at lower rates–for all commercial real estate sectors.

William Maher, Director of North American Strategy and Research with LaSalle Investment Management, Chicago, noted that the survey showed a “marked increase” in expected economic measures, largely due to President Trump’s proposals to reform the tax code, reduce regulatory burdens and invest in infrastructure. “However, while greater job and income growth will be positive for U.S. real estate markets, forecasters were reluctant to upgrade real estate fundamentals or returns,” he said. “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.”

The survey also found that sales volume will likely decline from $489 billion last year to $450 billion in 2017 and 2018 following 2015’s $547 billion post-recession high. “Still, the average volume of the three-year forecast period is surpassed only by 2007, 2015 and 2016 levels and remains well above the long-term average,” the report said.

ULI reported that economists expect a similar drop for commercial mortgage-backed securities issuance. CMBS issuance grew to $101 billion in 2015, then declined to $76 billion last year, a level that economists expect it will maintain in 2017. The report said CMBS issuance could grow to $80 billion next year and $85 billion in 2019.

Commercial real estate prices should grow over the next three years, but at “relatively subdued and slowing rates,” ULI said. Price growth could reach 5 percent in 2017 followed by 3.5 percent in 2018 and 3 percent in 2019. All three projections fall below the 5.7 percent average growth rate seen between 2001 and 2016.

Economists surveyed predicted that institutional real estate assets will provide 7 percent total returns this year, moderating to 6 percent in 2018 and 2019, ULI said. By property type, 2017 returns will likely range from 9.8 percent for industrial to 6 percent for offices and apartments.

Availability and vacancy rates for the industrial, office and retail sectors will likely improve this year but remain essentially flat in 2018 and 2019, the economists predicted. One exception: the apartment sector, where the vacancy rate increased slightly last year from near-historic lows in 2015, and where vacancy could rise once more in 2017. The hotel sector’s occupancy rate will likely 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,” ULI said. Rent increases will likely range from 4.6 percent for industrial to 2 percent for apartments for full-year 2017. Rent increases in 2019 will range from 3 percent for industrial to 2 percent for retail, office, and apartments. Analysts surveyed said hotel revenue per available room could increase by 2.5 percent in 2017 and 2.4 percent in 2019.