Real estate economists continue to have a generally bullish outlook for the U.S. economy, capital markets, and real estate fundamentals. Overall, expectations have improved since the prior forecast in March 2018, and the strong second-quarter gross domestic product (GDP) growth rate of 4.2 percent was fresh in forecasters’ minds as they weighed in on future years. Based on this forecast, the U.S. economy will easily surpass the current record for length of expansion (120 months) in mid-2019. Consistent with a strong economy, key real estate metrics—such as NCREIF Property Index (NPI) returns and transaction volumes—moved moderately higher in this survey. While expectations have improved, the survey was completed prior to recently announced tariffs by the United States and China that could curtail growth in 2019 and possibly beyond. While there are many potential outcomes for the current trade dispute, escalated tariffs with China could dampen the next round of forecasts in April 2019.
These results are based on the semiannual ULI Real Estate Economic Forecast, prepared by the ULI Center for Capital Markets and Real Estate, which will be discussed during a webinar and released later this week. The survey was completed in September 2018 by 45 economists/analysts at 33 leading real estate organizations.
Some of the highlights from the survey, which covers the 2018–2020 forecast period, include the following:
- U.S. GDP will grow by 3 percent in 2018, up from 2.8 percent in the last forecast. Assuming that growth hits this level, this will be the highest calendar-year growth rate of the current expansion. GDP growth is projected to stay strong in 2019 at 2.5 percent, while moderating to 1.7 percent in 2020 (down from 2 percent in the prior forecast).
- Net job growth should average 1.77 million per year through 2020, compared with a long-term average of 1.15 million. Compared with the last forecast, expected job growth is up in 2018 and 2019 and slower in 2020. Job growth is forecast at 2.4 million in 2018, higher than the past two years and falls to 1 million in 2020, possibly due to concerns about labor availability. The national unemployment rate is forecast to drop to 3.8 percent in 2018 and 2019, the lowest rate since 1969.
- Expected yields on the ten-year U.S. Treasury note fell slightly (10 basis points [bps]) compared with six months ago for both 2018 and 2019, somewhat surprising since the 2018 inflation rate moved up (to 2.5 percent). Forecast year-end (YE) yields are 3 percent and 3.3 percent, respectively, in those years. The 2020 yield is forecast to reach 3.5 percent in 2020 (up from 3.4 percent), close to the 20-year average of 3.6 percent.
- Real estate transaction volumes will decline slightly to $475 billion in 2018 (3 percent below 2017). The forecast for all three years is up from six months ago, with $450 billion and $415 billion projected for 2019 and 2020, respectively. Despite moderating since the cycle-peak transaction year of $569 billion in 2015, volumes are well ahead of the long-term average of $313 billion and equity and debt capital is readily available for most real estate investments.
- Expectations for commercial mortgage–backed securities (CMBS) issuance were stable. The consensus is for an average of $86 billion in new CMBS issuance over the next three years. This level of issuance is in line with 2017 ($88 billion) and ahead of the long-term average of $79 billion.
- Commercial real estate prices as measured by the Moody’s/RCA Commercial Property Price Index (CPPI) are projected to rise by a healthy 5 percent per year over the next three years (6 percent, 5 percent, and 4 percent, respectively), compared with the prior average of 3.4 percent and a long-term increase of 4.4 percent. As of July, the CPPI Index is up 7 percent year over year, so the 2018 forecast looks achievable.
- Rent growth expectations for the next three years rose for hotels (revenue per available room [RevPAR]) and apartments and fell for other property types. Industrial rent growth will lead all property types with 2018–2020 growth averaging 3.2 percent, followed by apartments (2.5 percent), hotels (2.3 percent RevPAR growth), office (1.7 percent), and retail (1.3 percent). We note that except for industrial, rental growth for all property types will be below forecast inflation rates.
- Over the next three years, national vacancy or availability rates are forecast to rise modestly for all property types, as solid demand is matched by increased supply. The apartment vacancy rate will increase to 5.2 percent in 2020 from 4.9 percent at YE 2017, consistent with the prior survey. Industrial availability will be 7.5 percent in 2020, barely higher than in 2017 and well below the long-term average of 10.1 percent. The office vacancy rate will increase by 60 bps over the next three years, ending 2020 at 13.6 percent. Finally, retail availability will finish 2020 with 9.8 percent vacancy, an increase of 20 bps over 2017.
- Forecast returns as measured by the NCREIF Property Index (NPI), which tracks core unleveraged institutional properties, have improved compared with the prior update. Total returns are forecast at 6.5 percent, 6 percent, and 5 percent for 2018, 2019, and 2020, respectively. Much of the forecast return will come from income, which is forecast at 5 percent in 2018 and rising to 5.3 percent in 2020. Industrial will continue as the strongest property type, with an average total return of 9.2 percent through 2019, compared with 5.8 percent for the overall index. All other property types will trail the index, with average returns of 5.5 percent for apartments, 5.1 percent for office, and 4.1 percent for retail. The retail return implies negative appreciation as the sector continues to face headwinds from e-commerce.
- Equity real estate investment trust (REIT) returns are the one area where forecasters moved to a more pessimistic stance, with lower return expectations compared with the spring forecast. The NAREIT composite is forecast to average 4.1 percent from 2018 to 2020, about 150 bps lower than the prior forecast and well below the 20-year average of 10.8 percent. While REIT returns often diverge from private real estate in the short term, the current ULI forecast predicts six years (2015–2020) of underperformance relative to private return indices.
- The single-family housing construction outlook weakened over the past six months, with starts forecast to rise to 900,000 and 930,000 units in 2018 and 2019, respectively, before slipping to 900,00 units in 2020, all years below the long-term annual average of almost 1 million homes.
In summary, respondents to the October 2018 ULI Real Estate Economic Forecast have become increasingly optimistic over the past six months for the first two forecast years. Strong GDP and job growth in 2018 have set the stage for solid real estate demand and absorption, particularly for the rest of 2018 and in 2019. Forecasters have signaled slowing—though still positive—growth in 2020, which could be due to a respite from the tax cut–led growth of the next 15 months or concerns that the very long current expansion cannot last forever. Expectations for the real estate market are more tempered than for the overall economy, with rent growth and return forecasts below trend and surprisingly moderate for late in the cycle. That said, if forecasters are correct about growth continuing through 2020, the 11-year real estate expansion that started in 2010 will be one of the longest on record.
