ULI, E&Y Project Rally in RE Capital Markets, Strong Housing Growth

What a difference six months make. The new real estate forecast from the Urban Land Institute and Ernst & Young shows expectations for growth--particularly in capital markets, housing and CRE fundamentals, have jumped from the previous report.

ULI Senior Vice President Dean Schwanke

What a difference six months make. The new real estate forecast from the Urban Land Institute and Ernst & Young shows expectations for growth, particularly in capital markets, housing and CRE fundamentals, have jumped from the previous report.

The Real Estate Consensus Forecast surveyed 38 economists and analysts from March 4 to March 25 and examined 27 economic and real estate indictors. The last report was released in September.

In a one-hour webinar held Wednesday to discuss the results, Howard Roth, Ernst & Young’s global real estate leader, said the forecast was “considerably more optimistic” than the previous one and showed “continued improvement over the next three years” for commercial real estate.

Predictions for CRE were up significantly with transaction volume this year expected to reach $310 billion from $290 billion in 2012. Increases to $340 billion are projected for 2014 and to $360 billion for 2015. Six months ago, transactions were predicted to range from $250 billion this year up to $275 billion in 2014.

Issuance of commercial mortgage-backed securities (CMBS), a key source of CRE financing, is projected to increase almost 50 percent this year from $48 billion in 2012 to $70 billion. The experts predict CMBS issuance to jump to $80 billion in 2014 and to $100 billion by 2015.

“After a prolonged period of uncertainty, we’re seeing a revival of investor confidence as the economy continues to recover,” ULI Senior Vice President Dean Schwanke, executive director of the ULI Center for Capital Markets and Real Estate,” said in a news release.

So far, the sequestration – automatic federal budget cuts in place since January – has not been devastating to the commercial real estate market but bears watching, particularly in the Washington, D.C. area, which is most affected by cutbacks, according to three CRE experts discussing the ULI/Ernst & Young forecast on the webinar.

“There are so many bright spots forming in this recovery,” said Kevin Thorpe, chief economist and principal at Cassidy Turley in Washington, D.C. “This economy really wants to go faster. Housing and equity markets are driving the growth.”

Joining Thorpe on the panel were Suzanne Mullvee, director of research at Retail, Property and Portolio (PPR) in Boston, and Craig Thomas, vice president of market research at AvalonBay Communities Inc. in Arlington, Va. Schwanke and Roth lead the discussion.

Not all the predictions are for increases, but they are considered within accepted or historical ranges, according to the report. Total returns for equity REITs are expected to be 12 percent this year and decline to 10 percent in 2014 and 8 percent in 2015. The report noted that, “While these reflect a sharp decline from the surging REIT returns of 28 percent in 2009 and 2010, the forecast suggest that the REIT returns are settling at a more sustainable level.”

Total annual returns from institutional-quality direct real estate investments for the apartment, retail, industrial and office sectors combined are forecast to be at 9.5 percent this year, but drop to 9 percent in 2014 and 8 percent in 2015. The report states that these figures are “continuing a downward trend that started last year, but remaining in the range of long-term historical averages.”

“The survey suggests that despite some tapering off of price increases and returns, the commercial real estate industry will, in general, be on solid footing for the next three years,” said Schwanke.

Schwanke noted that returns for the apartment sector, expected to be 10 percent this year, were the strongest of all the asset classes. But the report expects “some cooling in the apartment sector.” Vacancy rates are projected to hold at 5 percent this year, and then rise to 5.2 percent for 2014 and 2015. Rental growth rates are predicted to be 3.8 percent down from 4.1 percent in 2012. As more units hit the market, rental growth rates are projected to decline to 3 percent in 2014 and 2.8 percent in 2015.

For the other sectors, rental rate growth is expected to be up 2 percent this year and 3 percent for both 2014 and 2015 in the industrial/warehouse part of the market; and to rise only slightly for retail, by 1 percent this year and 2 percent for both 2014 and 2015. Office rental rates are projected to decline by 3.5 percent this year, but increase by 4 percent in 2014 and 2015.

“There is a rising pattern there which bodes well for the office sector,” Schwanke said during the webinar.

Industrial/warehouse, office and retail are all expected to see vacancy drops starting this year and continuing through 2014 and 2015.

Mullvee said the low rental rate growth numbers show that “retail is still going through a massive reposititioning.”

“There are some (centers) that are very strong and some that are bleeding today,” she said.

Thomas added that much of the multi-family development occurring now has retail components. While restaurants and grocery stores are always welcome, Thomas said it has been “challenging to make some of the retail space work” and suggested developers might want to rethink some of the mixed-use formats.

Single­-family housing starts are rising after reaching near-record lows between 2009 and 2011. Going from 535,000 in 2012 to about 700,000 this year, single-family starts should be more than 1 million by 2015. The national average home price is expected to be higher by 6 percent this year then dip to 5.3 percent a year later and by 5 percent in 2015. The forecast noted that those numbers are “well above previous projections,” adding that it “reflects signs of a solid housing recovery.”

Overall, Roth concluded that the report’s findings show the U.S. real estate market is on the right track and poised to continue attracting international investors.

“Institutional global capital is searching for a home that provides the best risk-adjusted return, without regard for borders,” Roth said in the release.