ULI—Healthy Real Estate Markets Through ’17

The Urban Land Institute Center for Capital Markets and Real Estate predicts the real estate industry will expand through the next couple of years.

With its weakened job growth, sluggish GDP expansion, and uncertainty about interest rates, the first quarter produced some jitters about the economy, and thus the potential for further real estate growth. (At least compared with the somewhat more robust last few quarters of 2014). But not everyone’s so edgy, at least about the prospects for real estate growth in the coming years. This week, the Urban Land Institute Center for Capital Markets and Real Estate released its latest semi-annual annual ULI Real Estate Consensus Forecast, and it’s predicting solid growth for the real estate industry from this year through 2017.

The forecast is based on a survey of 46 leading industry economists and analysts representing 33 major real estate investment, advisory, and research firms and organizations. Some of the reasons for their relative optimism include projected job growth over the next three years; the return (more or less) to a healthier lending climate; growth in rents; and appreciation in property valuation. Job growth will be the critical factor sustaining real estate markets. Despite recent bumps, survey respondents expect net job growth to be 2.9 million per year through ’17, compared to a long-term annual average of only 1.2 million. Part of that is influenced by demographics: the country is entering a period in which more Millennials will enter the job force than Baby Boomers will leave it.

The winning-est property types from 2015-17, according to the ULI survey, will be hospitality and industrial. For instance, hotel RevPAR is expected to grow an average of 5.3 percent annually over the three-year period, while industrial rents will be up 3.6 percent — both considerably higher than historic norms. Hotel occupancy rates are forecast to rise from 64.4 percent in 2014 to 65.6 percent in 2016 and ’17. Industrial availability rates are predicted to drop from 10.3 percent in 2014 to 9.6 percent for 2016 and ’17.

As for the office market, the ULI survey predicts a decline in office vacancy rates, dropping from 13.9 percent in 2014 to 12 percent by the end of 2017 — not a drastic movement, but a nice improvement, though naturally some markets will do better than others. Survey respondents expect office rental rates to rise by 4 percent in 2015; 4.1 percent in 2016; and 3.5 percent in 2017 — also a healthy progression. In the apartment market, which has done so well in the last five years, vacancy rates are forecast to rise marginally from 4.6 percent in 2014 to 5.3 percent in 2017. Rental rates will continue to rise — by 3.5 percent in 2015; 3 percent in 2016; and 2.7 percent in 2017 — solid, but not at the breakneck pace of recent years. And again, some places will benefit from the trend more than others. Though the survey didn’t address it, all growth bets are still off for real estate markets in energy-state markets.