Near-Term CRE Outlook ‘Promising’

U.S. commercial real estate industry performance will likely be stronger than previously anticipated through 2018, said the Urban Land Institute, Washington, D.C.

The twice-yearly ULI survey of 48 economists and industry analysts about expectations for the next three years showed expectations for commercial real estate increased compared to six months ago.  Although the outlook for stronger growth in the economy could be accompanied by higher inflation and higher interest rates, the rate hikes are unlikely to diminish 2018 real estate returns, the report said.

“The outlook for individual property sector fundamentals generally continues to reflect the characteristics of the current real estate cycle,” said PwC Director of Real Estate Research Andrew Warren, a survey participant. “Fundamentals either are steadily improving or appear to have stabilized at sustainable levels.”

Warren noted different property sectors will likely perform differently, “[But] there is no indication that we are about to see any imbalance in 2018 that will send any of the sectors into a significant downturn,” he said.

Analysts said industrial sector returns should be higher than they projected six months ago, while the office, retail and apartment returns are expected to remain steady or be slightly lower than previously anticipated. Forecasts for 2019 and 2020 showed a moderating trend for all property sectors.

Transaction volume should reach $450 billion this year and $425 billion in 2019, higher than projected six months ago, before moderating to $408 billion in 2020. Similarly, commercial mortgage-backed securities issuance could reach $90 billion this year and next before decreasing to $80 billion in 2020.

“The prices paid for real estate may also see some initial benefit from a higher level of transaction activity,” ULI said. Respondents expect prices will rise 5 percent in 2018 then moderate to 3 percent and 2.3 percent in 2019 and 2020, respectively.

Analysts anticipate interest rates to be 0.4 percent higher in 2018 and 2019 than previously expected, with the 10-year U.S. Treasury rate rising to 3.1 percent by the end of 2018 and 3.4 percent in 2019. The 10-year Treasury rate will likely remain steady at 3.4 percent in 2020, the survey said.