RE Forecast: Cloudy with Some Sunshine

Executives from Hines, AvalonBay and Trepp offered their outlook for the next three years as ULI unveiled the results of its Real Estate Consensus Forecast.

Joshua Scoville, senior managing director, investment management at Hines; Craig Thomas, vice president of market research at AvalonBay Communities; and Matthew Anderson, managing director at Trepp Inc.
Joshua Scoville, senior managing director, investment management at Hines; Craig Thomas, vice president of market research at AvalonBay Communities; and Matthew Anderson, managing director at Trepp Inc.

ULI unveiled the results of its Real Estate Consensus Forecast at the 2017 Spring Meeting in Seattle, leading a panel of economists to discuss how the industry will be changing within the next two to three years. The consensus forecast is based on the median of 53 economists and analysts at 39 leading real estate organizations. The current U.S. real estate cycle is already one of the longest since World War II, so without productivity gains, increased workforce participation or a reduced regulatory environment, the panelists: Joshua Scoville, senior managing director, investment management at Hines; Craig Thomas, vice president of market research at AvalonBay Communities; and Matthew Anderson, managing director at Trepp Inc., don’t see much change within the next few years.

There will be an expected economic expansion over the next three years, though employment growth and the unemployment rate is set to slow. GDP growth is expected, with it being at 1.6 percent in 2016 and forecasted to raise to 2.3 percent this year and 2.6 percent in 2018. There will be a slight decline in 2019 of 2 percent but compared to previous years, this will still make an impact. Compared to forecasts of six months ago, the forecasts for GDP, unemployment rate and employment growth are more optimistic for both 2017 and 2018.

Interest Rates

The 10-year Treasury rate is expected to grow throughout the next three years, as it has steadily increased since 2014. Last year it was at 2.5 percent and that amount is forecasted to increase to 2.8 percent in 2017 and plateau to 3.2 percent in 2018 and 2019. “It is entirely possible that rates could rise this much, but right now it seems a bit too rich for me,” said Anderson. “When the survey was done, we had a 50 basis point jump in the short and long end on the interest rate spectrum. Right now its looking a little ambitious but it could certainly get there.” 

Transaction Volume

Commercial real estate transaction volume had consistently increased for six years through 2015 to a post-recession peak of $547 billion, but decreased in 2016 to $489 billion. Volume is expected to further decline in 2017 to $450 billion and remain at that level in 2018 and decline in 2019 to $430 billion. Despite these projected declines, volumes remain substantially above the 16-year average of $293 billion. “Transaction volume should continue to slow through 2019 and pick up maybe within a decade,” said Scoville. “Right now there is a stand-off between sellers and buyers and ultimately I think the buyers will end up winning. There’s a lot of existing debt out there so that will be shaking the tree in terms of existing deal flow.”

Based on the ULI Consensus Forecast, issuance of CMBS had rebounded consistently since 2009, but declined in 2016 to $76 billion from 2015’s $101 billion. This results in an expected decrease to $74 billion in 2017 followed by an increase to $80 billion and $85 billion in 2018 and 2019, respectively.

NCREIF Returns

By property type, returns for the industrial sector are forecasted at 9.8 percent, followed by retail (7 percent), and apartment and office (6 percent). All sector returns are expected to further decline by 2019, with industrial returns forecast at 7.9 percent and retail, office and apartment returns at 6 percent, 5.6 percent and 5.5 percent, respectively. Forecasts for 2017 are more optimistic for the industrial sector and less optimistic for the apartment, retail and office sectors. Forecasts for 2018 are more optimistic for the industrial, retail and apartment sectors and less optimistic for the office sector.

Although total returns are declining, there is still a bullish outlook for several of the sectors, such as industrial and office. “Rent growth shows that industrial is easy to build. It’s a simple way of repurposing real estate,” added Scoville. Technology plays a part in the disruption of industrial and retail growth, with most consumers looking to eCommerce solutions for everyday needs. Demographics also shift the use of retail, with there being a higher use for those not in the Millennial or newer generations due to the reliance on technology and instant services.

“Nothing stimulates retail more than having a family,” said Thomas, “but on the other hand, Baby Boomers are retiring and thus not spending money. Age change has a valuable impact because less people rent apartments as they get older and their habits of how they spend money drastically change.” This also plays a part in the office sector, as tenants of different age stages will have changing needs for a space. Tenants are being savvier with how they use space, creating open and shared communal areas as opposed to closed off individual offices, added Anderson. This is increasing in popularity with those hiring Millennials, as they view teamwork and idea sharing as being most productive to the work flow.

As for apartment returns, vacancy rates decreased from 7.1 percent in 2009 to 4.6 percent in 2015, before an increase to 4.9 percent in 2016. Vacancies are expected to continue upward the next three years, to 5.2 percent in 2017, 5.3 in 2018, and reaching the 20-year average of 5.4 in 2019. Rental rate growth is expected to increase to 2 percent in 2017 and stay there over the next two years. “No matter what the changes. There will still always be opportunities in mixed-use communities. There is no overabundance in walkable, transit-oriented projects that can offer living, working and entertaining spaces,” concluded Thomas.

Data and charts courtesy of ULI