ULI: Industry to See Improvements Through 2014, Bolstered by Cap Markets
By Nicholas Ziegler, News Editor
“Is distress in the real estate markets behind us?” was the main question on the minds of the respondents to the latest survey by the Urban Land Institute — and the consensus seemed to be a cautious “yes.”
The ULI’s survey of 38 real estate economists and analysts across the nation — which marks the state of a semi-annual ULI Real Estate Consensus Forecast — projects broad improvements for the country’s economy, real estate capital markets and real estate fundamentals through 2014. In the next three years, commercial-property transaction volume is expected to increase by 50 percent and CMBS issuances are set to double, the report said.
“CMBS is the critical sector for run-of-the-mill properties,” Peter Linneman, principal of Linneman Associates and CEO of American Land Fund, said. “It was a small part 10 years ago that went to a huge part of the capital in 2007 to being almost nonexistent in 2009. The forecast is that (CMBS issuances) will rebound.”
The report’s other findings were myriad. Institutional assets and REITs are expected to provide annual returns ranging from 8.5 to 11 percent. Vacancy rates are slated to drop between 1.2 and 3.7 percent for office, retail and industrial properties, while apartments are expected to remain at stable, low levels. Hotel occupancy rates, similarly, are likely to rise.
The survey results suggest a marked increase in commercial real estate activity, with total transaction volume expected to rise from $250 billion in 2012 to $312 billion in 2014. CBMS issuances, a key source of CRE financing, is expected to jump from $40 billion in 2012 to $75 billion in 2014 (a considerable increase from the recession’s low point of $3 billion in 2009).
“Commercial real estate returns for institutional quality and REIT assets have performed very well in recent years, and this performance is expected to remain strong but trend lower over the next three years,” Dean Schwanke, executive director of the ULI Center for Capital Markets and Real Estate, said.
In the multi-family sector, the forecast predicts a modest increase in vacancy rates, from 5 percent this year to 5.1 percent in 2013 to 5.3 percent in 2014; and a decrease in rental growth rates, with rents expected to grow by 5 percent this year, and then moderate to a growth rate of 4.0 percent for 2013 and 3.8 percent by 2014. This may be indicative of supply catching up with demand.
For offices, the improved employment outlook is reflected in predictions. Vacancy rates are expected to keep declining, reaching 15.4 percent in 2012, 14.4 percent in 2013, and 12.3 percent by the end of 2014. Office rental rates are expected to rise steadily, increasing 3.0 percent in 2012, 3.7 percent in 2013, and 4.3 percent in 2014.
The strengthening economy is also expected to boost the retail sector. Following years of rising vacancies, vacancy rates are expected to tighten to 13.0 percent by the end of 2012, 12.5 percent by 2013, and 12.0 percent by 2014. Retail rental rates are projected to rise by a slight 0.8 percent in 2012, and then increase more substantially in 2013 by 2 percent, and by 2.8 percent in 2014.
Industrial properties are slated to see vacancy rates continue their decline, reaching 12.8 percent by the end of 2012, 12.1 percent in 2013, and 11.5 percent by the end of 2014. Warehouse rental rates are expected to show growing strength, with an increase of 1.9 percent anticipated for 2012, 3.0 percent in 2013, and 3.6 percent in 2014.
“Is distress behind us?” Linneman asked. “It’s not behind us but it has (hit) the crescendo. Low interest rates have given us a lot more flexibility.”
The survey, conducted during late February and early March, is a consensus view and reflects the median forecast for 26 economic indicators, including property transaction volumes and issuance of CMBS; property investment returns, vacancy rates and rents for several property sectors; and housing starts and home prices.