Real Estate Economists Expect Short-Lived Recession

The COVID-19 crisis has shocked markets everywhere, but some U.S. real estate economists expect a short-lived recession and above-average GDP growth in 2021 and 2022, said the Urban Land Institute, Washington, D.C.

ULI’s latest Real Estate Economic Forecast surveyed 39 economists and analysts at 35 real estate organizations. Their consensus: the pandemic’s impact on real estate market conditions and values will likely be less severe than the 2008 financial crisis with the exception of the retail and hotel sectors. But the analysts said “unknowns” about the global pandemic are tempering their expectations.

“Real estate economists expect that while the top-line economic impact of COVID-19 will be much worse than the Global Financial Crisis, U.S. real estate market fundamentals and values will fare much better compared to that era,” said William Maher, retired Director of Americas Strategy and Research at LaSalle Investment Management. “Among real estate indicators, only retail and hotel are expected to suffer a worse outcome, while most property type returns and market fundamentals will [likely] perform much better than they did during the Great Financial Crisis.”

Other findings from the semi-annual survey:

–Economists expect U.S. GDP to fall 6 percent this year, which would be the largest single-year decline since 1946. GDP could grow 3.9 percent in 2021 and 3.6 percent in 2022, both well above the 2.1 percent long- term average.

–Net job growth could reach negative 10 million for 2020, ULI said. This estimate implies a “very meaningful” recovery during the latter part of 2020. The forecast estimates the U.S. unemployment rate could finish 2020 at 11.3 percent then decline to 5.9 percent by year-end 2022.

–Expected yields on the 10-Year U.S. Treasury note could stay very low this year and gradually increase next year while remaining below long-term averages. Economists estimate the 10-year yield in 2020 to be 0.8 percent and move up to 1.7 percent in 2022.

–Real estate transaction volumes will likely decrease to $275 billion in 2020, but forecast transaction volumes over the next two years show a much healthier capital market than seen during the 2008 financial crisis.

–Commercial real estate price growth as measured by the Real Capital Analytics Commercial Property Price Index could fall by seven percent in 2020–less than the 13.6 and 20.8 percent decreases during 2008 and 2009, respectively, ULI said. Economists believe one reason for this is more debt financing could be more available next year than during the 2008 financial crisis.

–Economists expect rent growth to be led by the industrial sector for the next three years, averaging 2.2 percent from 2020 to 2022. Apartment growth could fall by two percent in 2020 but have an overall three-year positive average of 1 percent. All other major property types (hotel, retail and office) will likely see negative growth over the next three year period, with hotels at -5.3 percent revenue available per room, retail at -3.1 percent and office at -1 percent.

–Economists believe equity real estate investment trust returns will average -18 percent in 2020, but could rally with 10 percent returns in both 2021 and 2022.