WASHINGTON, DC - A new U.S. industry forecast from the Urban Land Institute (ULI) and EY projects continued improvement for real estate capital markets and commercial real estate fundamentals. The latest findings reveal high expectations for growth in the housing sector, as well as improved confidence about commercial mortgage-backed securities (CMBS) issuance, existing single-family housing prices, and industrial sector fundamentals when compared to responses from just six months ago.
The results of the latest ULI/EY Real Estate Consensus Forecast, a semi-annual survey of economists and analysts at 38 of the nation's leading real estate organizations, is the fourth in a series of polls initiated to gauge industry sentiment. The survey, conducted by the ULI Center for Capital Markets and Real Estate between August 27 and September 13, 2013, provides forecasts for broad economic indicators, real estate capital markets, property investment returns for four property types, vacancy rates and rents for five property types, as well as housing starts and prices.
Among the forecast's key findings: commercial property volume is expected to increase from $299 billion in 2012 to $300 billion in 2013, before growing to $330 billion in 2014 and $350 billion in 2015. The issuance of CMBS, a key source of financing for commercial real estate, is projected to increase by more than 100 percent over three years. Forecast respondents expect CMBS issuance to jump from $48 billion in 2012 to $75 billion in 2013, then a rise to $88 billion in 2014 and $100 billion in 2015.
Total returns for equity real estate investment trusts (REITs), tracked by the National Association of Real Estate Investment Trusts (NAREIT), are expected to drop dramatically, from 18.1 percent in 2012 to 4.0 percent in 2013, before recovering to a modest 8.0 percent in both 2014 and 2015.
While the Moody's/RCA Commercial Real Estate Property Index increased by 7.9 percent in 2012, a slower pace is expected for the next three years. It is expected to rise only 6.5 percent in 2013, 5.5 percent in 2014, and 5.0 percent in 2015. At the same time, returns for institutional-quality direct real estate investments are expected to trend lower than the 2012 rate of 10.5 percent .These returns, measured by the National Council of Real Estate Fiduciaries, are expected to yield returns of 8.5 percent in 2013, 8.8 percent in 2014, and 8.6 percent in 2015.
According to Anita Kramer, vice president, ULI Center for Capital Markets and Real Estate, even though the survey results reflect the current sentiment among leading real estate investors, industry opinion could change since respondents were polled before the shutdown of the federal government. "The consensus among survey respondents is that both the economy and real estate industry are making progress," said Kramer. "While optimism has improved for real estate capital markets, the uncertainty of federal budget legislation will likely have a negative impact on this outlook."
"According to this survey, real estate investors anticipate that the improving U.S. economy will continue to help strengthen real estate markets," said Howard Roth, EY's global real estate leader. "The results are truly promising for commercial real estate and housing sectors, showing increasing confidence going forward."
Continued Improvements in the Economy and Housing Sector
In general, the findings of the forecast indicate an expectation in overall economic improvement over the next three years. According to the forecast, the gross domestic product (GDP) is expected to grow by 1.9 percent in 2013, followed by an increase of 2.6 percent in 2014 and 2.9 percent in 2015. The outlook for unemployment is positive, with respondents expecting the unemployment rate to fall to 7.2 percent by the end of 2013, 6.8 percent by the end of 2014, and 6.3 percent by the end of 2015. This reflects the report's expectation that 2.2 million jobs will be created in 2013, followed by 2.4 million in 2014 and 2.6 million in 2015.
According to the forecast, ten-year treasury rates are projected to increase by the end of 2013 to 3.0 percent, followed by a rise to 3.4 percent by the end of 2014 and 4.0 percent by the end of 2015. These rising rates will increase borrowing costs for real estate investors; however, survey respondents do not expect substantial increases in real estate capitalization rates for institutional-quality investments, which are expected to remain at 5.8 percent in 2013, before rising to 6.0 percent in 2014 and 6.3 percent in 2015.
A continued rally is expected for the housing sector, with forecasters projecting a strong ending to 2013 and continued growth in 2014 and 2015. Single-family housing starts, which were at half-century lows between 2009 and 2011, ended 2012 at 535,300 units. Forecasters predict these numbers to continue rising and reach 675,000 units in 2013, 800,000 units in 2014, and 900,000 units in 2015.
Changing Fundamentals by Property Type
The forecast anticipates higher rents for all four major commercial property sectors in 2013. Projections for increases range from 0.2 percent for retail to 3.3 percent for industrial. In addition, rents increases in 2015 are predicted to range between 2.0 and 4.0 percent.
Vacancy rates are expected to decrease modestly for both office and retail properties. Office vacancy rates, which remained at 16.5 percent in 2009 and 2010, began to decline in 2011 and 2012. These declines are expected to continue over the next three years, falling to 15.0 percent in 2013, 14.4 percent in 2014, and 13.8 percent by the end of 2015. Rental rates for office properties are expected to continue strengthening, increasing by 2.0 percent in 2013, 3.1 percent in 2014, and 4.0 percent in 2015.
Compared to the Consensus Forecast from six months ago, the recent findings show a modest increase in optimism for retail availability rates. After six years of increasing retail availability rates, investors saw a decline in 2012. The findings project continued improvements over the next three years, with the expectation that availability rates will decline to 12.2 percent by the end of 2013, 11.8 percent by 2014, and 11.5 percent by 2015. After five years of declining retail rental rates, the forecast predicts rates to inch up by 0.2 percent in 2013 and by 2.0 percent in both 2014 and 2015.
The outlook for the industrial/warehouse sector continues to brighten, with expectations of continued decreases in vacancy rates. More optimistic than the April forecast, respondents expect the vacancy rate to fall from its 2012 level of 12.7 percent to 11.8 percent by the end of 2013, before declining further to 11.3 percent in 2014 and 10.8 percent by the end of 2015. Warehouse rental rates, which experienced substantial declines in 2009 and 2010 before a slight rebound in 2012, are expected to rise to 3.3 percent in 2013, 3.5 percent in 2014 and 3.2 percent in 2015.
In the apartment sector, which has performed well over the past two years, vacancy rates are expected to decline to 4.9 percent by the end of 2013, before rising to 5.2 percent by 2015. In addition, while apartments are expected to continue showing consistent rental rate growth, this growth is expected to happen at decelerated levels from the last years' jump. Rental rates are expected to rise 2.7 percent in 2013, before moderating to 2.6 percent in both 2014 and 2015, as new supply hits the market.
Hotel occupancy rates are expected to improve over the next three years. The forecast findings show improved expectations for the sector, with projections that occupancy rates will continue to increase to 62.0 percent in 2013, before inching up to 62.6 percent by 2014. By the end of 2015, rates are expected to increase to 63.1 percent, a projection that is just shy of the pre-recession peak of 63.2 percent in 2006.
The ULI/EY Real Estate Consensus Forecast reflects consensus reached on 27 economic and real estate indicators; the forecast for each indicator is the median forecast from the 38 survey respondents. The next semi-annual forecast is slated to be released in April 2014.