Commercial property transaction volume is expected to decline over the next three years to $475 billion in 2018, according to a new three-year economic forecast from the Urban Land Institute (ULI) Center for Capital Markets and Real Estate.
However, this volume forecast over the next three years is surpassed only Q volumes in 2007 and 2015; and follows six years of commercial property volume growth.
The latest ULI Real Estate Consensus Forecast, a semi-annual outlook, is based on a survey of 48 of the industry’s top economists and analysts representing 36 of the country’s leading real estate investment, advisory, and research companies.
Overall, the recent Consensus Forecast for April 2016 projects continued economic expansion over the next three years, but at a somewhat slower pace than the prior two years.
It also anticipates continued commercial price appreciation and positive returns, but at more subdued and decelerating rates; above-average but decelerating rent growth rates in all property sectors, and better than average vacancy/occupancy rates, except for retail.
Single family housing starts are projected to continue increasing, but remain below the long-term average.
Other key findings of the Consensus Forecast include:
• Issuance of commercial mortgage-backed securities (CMBS) is expected to decline in 2016 to $85 billion and then return to $100 billion in both 2017 and 2018.
• Commercial real estate prices are projected to grow but at subdued and slowing rates over the next 3 years, at 5.0 percent in 2016, 2.7 percent in 2017 and 3.0 percent in 2018, all below the long-term average growth rate of 5.8 percent.
• Institutional real estate assets are expected to provide total returns of 8.1 percent in 2016, moderating to 7.2 percent in 2017 and 7.1 percent in 2018. By property type, returns are expected to be stronger for industrial and office, followed by apartments and retail, in 2016. By 2018, there is little variation among property type.
• Vacancy rates are expected to continue to improve modestly for office and retail over all three forecast years. Industrial availability rates and hotel occupancy rate are forecasted to improve modestly in 2016 and then slightly reverse direction in 2017 and 2018. Apartment vacancy rates are also expected to rise over the next three years.
• Commercial property rents are expected to increase for the four major property types in 2016, ranging from 2.0 percent for retail up to 4.0 percent for office and 4.5 percent for industrial. Rent increases in 2018 in these four types will range from 1.7 percent for retail to 3.0 percent for office. Hotel RevPAR is expected to increase by 4.6 percent in 2016 and 3.0 percent in 2018. • Single-family housing starts are projected to increase from 714,600 units in 2015 to 900,000 units in 2018, remaining below the 20-year annual average.
While survey respondents are registering more concern over the growth of the U.S. real estate market, economists are calling for a more preferable gradual slowdown, said ULI leader and survey participant William Maher, director of North American strategy for LaSalle Investment Management.
Compared to six months ago, real estate researchers are predicting slower economic growth, slipping real estate fundamentals and lower returns from both the public and private markets. As was the case six months ago, there is no imminent downturn on the horizon, although global economies and markets remain fragile and volatile,” he added.