Real estate consensus forecast projects higher annual returns for institutional retail, industrial, and office properties compared to April’s outlook.
WASHINGTON (October 15, 2014) – The latest three-year outlook from the Urban Land Institute (ULI) and EY predicts continued strengthening in the real estate capital markets and commercial real estate fundamentals despite slightly less optimistic forecasts for commercial mortgage-backed securities (CMBS) issuance, housing starts, and house price growth. The new U.S. real estate forecast – covering 2014 through 2016 – is based on a survey of 43 of the industry’s top economists and analysts representing 32 of the country’s leading real estate investment, advisory, and research firms and organizations.
The latest survey results of the semi-annual ULI/E&Y Real Estate Consensus Forecast, prepared by the ULI Center for Capital Markets and Real Estate, were released today during a ULI webinar open to ULI members and the media. The market survey, conducted last month, is the sixth in a series of polls conducted to gauge sentiment among economists and analysts about the direction of the real estate industry.
“Compared to the previous forecast in April 2014, this forecast remains positive and is even slightly more optimistic regarding commercial property transaction volume and prices; annual returns for institutional retail, industrial, and office properties; and, somewhat surprisingly, fundamentals in the multifamily sector,” said Anita Kramer, senior vice president of the ULI Center for Capital Markets and Real Estate. “While forecasts are slightly lower for a few key indicators–CMBS issuance, housing starts and growth in housing prices – they remain positive.”
“Global investors generally have an optimistic view of real estate market opportunities worldwide. A wide consensus said that transaction volume will continue to increase globally,” said Howard Roth, global real estate leader at EY. “We are seeing an acceleration of capital flows from East to West, new REIT legislation in emerging markets, and extensive debt and equity capital available for real estate transactions globally. While some see an economic slowdown as a concern, currently, conditions remain positive for real estate investing over the next several years.”
The Consensus Forecast’s key findings include:
- Commercial property transaction volume is predicted to grow, although at a declining rate, and exceed 2006 volume (the second highest pre-recession annual volume) by 2016. Volume in 2016 is forecast at $445 billion.
- CMBS issuance – which increased nearly 80 percent in 2013 – is expected to continue growing at a more moderate annual pace, increasing another 43 percent by 2016.
- Institutional real estate assets are expected to provide total returns of 11 percent in 2014, moderating to 8.5 percent annually by 2016.
- Commercial property prices are expected to increase by 10 percent in 2014. Price increases will then moderate to 6.0 percent in 2015 and 5.0 percent in 2016.
- Vacancy rates are expected to decrease modestly for office, retail and industrial properties and rise slightly for apartments. In addition, hotel occupancy rates are expected to continue improving.
- Commercial property rents are expected to increase for the four major property types in 2014, ranging from a growth rate of 2.0 percent for retail up to 4.0 percent for industrial. Rent increases for all property types are projected to rise by 3 percent in 2016, with the exception of office space, which is predicted to increase by 4 percent.
- Single-family housing starts are projected to increase to 912,500 units per year by 2016, remaining below the long-term annual average.
The latest Consensus Forecast projects solid growth over the next three years for the U.S. economy. Despite a projection that the 2014 economic growth rate will be lower than for 2013 – likely due to the weather-related decline in the first quarter – the new outlook expects annual gross domestic product (GDP) growth to strengthen and exceed the 20-year average in 2015 and 2016, with growth rates in both years at 3.0 percent. The unemployment rate is expected to fall to 6.0 percent by the end of 2014 and remain there in both 2015 and 2016. In addition, survey respondents expect inflation to remain consistent at 2.0 percent for the next three years while predicting ten-year treasury rates to remain at 3.0 percent in 2014 and 2015 before rising to 4.0 percent by the end of 2016.
Real Estate Capital Markets
Commercial real estate transaction volume is expected to increase to $400 billion in 2014, $425 billion in 2015, and $445 billion in 2016, with volume in 2016 exceeding the second highest pre-crash annual level. Issuance of commercial mortgage-backed securities (CMBS), a key source of financing for commercial real estate, is expected to continue its rebound through 2016. Issuance is projected to increase to $92 billion in 2014 and grow over the next two years to $110 billion in 2015 and $123 billion in 2016.
The single-family housing sector, according to the Consensus Forecast, is expected to experience solid gains through 2016. Single-family housing starts, which were at a half-century low of 430,600 starts in 2011, are projected to continue increasing to 650,000 in 2014, 800,000 in 2015, and 912,500 in 2016. Even with this growth, the 2016 projection remains below the 20-year annual average. Survey respondents expect home prices to continue rising but at a more moderate and steady pace–4.5 percent in 2014, 4.0 percent in 2015, and 4.0 percent in 2016 – which are just above the long-term average.
Commercial Property Outlook
The Consensus Forecast survey findings, by commercial property type, are listed below:
- Apartments – End of year vacancy rates for the apartment sector are expected to slightly rise to remain low at 4.9 percent in 2014, 5.0 percent in 2015, and 5.1 percent in 2016. After two years of significant apartment rental rate growth, it slowed to 2.3 percent in 2013, according to CBRE. However, survey respondents expect rental rates to increase to 3.0 percent in 2014 and continue at that growth rate in both 2015 and 2016.
- Industrial/warehouse – For the past several years, CBRE has reported strong annual declines in availability rates for the industrial/warehouse sector. According to the latest Consensus Forecast, vacancy rates are expected to continue decreasing but at a slowing pace, from 11.2 percent in 2013 to a projected 10.6 percent in 2014, 10.2 percent in 2015, and 10.1 percent by the end of 2016. In addition, rental growth rate is expected to continue its healthy growth of 4.0 percent in both 2014 and 2015, and then moderate to 3.0 percent in 2016.
- Office – The Consensus Forecast predicts a continuing decline in office vacancy rates, decreasing to 14.4 percent in 2014, 13.9 percent in 2015, and 13.4 percent by the end of 2016. Survey respondents expect rental rates – which grew at a healthy 2.6 percent in 2013 – to continue strengthening through 2016, increasing by 3.0 percent in 2014 and by 4.0 percent in both 2015 and 2016.
- Retail – Despite declines during the past six years, Consensus Forecast respondents expect a turnaround in 2014, with retail rental rates increasing by 2.0 percent by the end of the year, and then 3.0 percent in both 2015 and 2016. Regarding retail availability rates, the outlook predicts gradual improvements over the next three years, with rates expected to decline to 11.6 percent by 2014, 11.2 percent by 2015, and 10.9 percent by 2016.
- Hotel – The Consensus Forecast expects hotel occupancy rates to continue strengthening, rising to 63.2 percent in 2014, 63.8 percent in 2015, and 64.1 percent by 2016. The 2014 projection matches the pre-recession peak in 2006, while the 2015 and 2016 projections exceed it. According to survey respondents, growth in hotel revenue per available room (RevPAR) over the next three years is expected to remain above the long-term average annual growth rate. RevPAR is expected to grow at 7 percent in 2014, 5.5 percent in 2015, and decelerate somewhat in 2016 to 4.0 percent.
The ULI/E&Y Real Estate Consensus Forecast reflects consensus reached on 26 economic and real estate indicators; the forecast for each indicator is the median forecast from the 43 survey respondents. The next forecast is scheduled for release during April 2015.
About the Urban Land Institute
The Urban Land Institute (www.uli.org) is a nonprofit education and research institute supported by its members. Its mission is to provide leadership in the responsible use of land and in sustaining and creating thriving communities worldwide. Established in 1936, the Institute has over 32,000 members representing all aspects of land use and development disciplines.
EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.
EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information, visit ey.com/realestate. EY is a client serving member of EY Limited located in the United States.
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