ULI Real Estate Consensus Forecast

Posted by Jarvis Woodson on May 24, 2017
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The ULI Center for Capital Markets and Real Estate released the results of the ULI Real Estate Consensus Forecast. The Forecast is positive with a higher real Gross Domestic Product (GDP) growth in 2017 and 2018 than was previously forecast.

This last survey of 54 economists and analysts from 39 leading real estate organizations took place during March and early April of this year. This latest survey likely shows an increase in economic measures due to federal proposals to reduce regulatory burdens, reform the tax code and invest in infrastructure.  

Real estate economists have higher expectations than 6 months ago regarding employment growth, housing starts and GDP growth. The stronger economy has led to forecasted interest rates and inflation to move higher.

However, there is little change from the projections six months ago in key real estate metrics, such as NCREIF Property Index (NPI) and returns and transaction volumes.

2017-2019 forecast period highlights:

  • Job Growth

    • The unemployment rate is projected to drop to 4.5% in 2018.
    • Net long-term job growth average is forecasted in 2017 at 2.2 million but tapers to 1.55 million in 2019 possibly because of labor availability concerns due to the projected drop in unemployment.
  • U.S. GDP Growth

    • Projected to grow by 2.3% in 2017 and 2.6% in 2018. This is an increase over the last forecast of 20 and 60 basis points (bps), respectively.
    • Both years are at or above the 20-year average of 2.3%.
    • Growth is expected to moderate to 2% in 2019.
  • U.S. Treasury Yields Rise

    • Expected yields on the 10-year note rose sharply in the recent forecast after it had fallen previously.
    • Forecast year-end (YE) yield rose 60 bps to 2.8% for 2017. It rose to 70 bps to 3.2% in 2018.
    • This is a sizeable forecasted increase from current 2.3% rate in mid-April 2017.
    • Higher long-term rates may be driven by the Federal Reserve’s initiation of gradual increases in the short-term Fed Funds rate.
  • Real Estate Transaction Volumes Fall

    • Transaction volumes projected to fall to $450 billion in 2017, with a decline of 8% (39 billion) from 2016. This is unchanged from fall 2016 forecast.
    • 2018 and 2019 transaction volumes will stay strong at their respective $450 billion and $430 billion projections and remain above the long-term average of $293 billion.
    • Real Capital Analytics reports U.S. transactions are down over 30% YTD as of February. This decline is attributed to the rise in interest rates as well as the political uncertainty during the fourth quarter of 2016 and many expect transactions to pick up as 2017 progresses.
  • Commercial Real Estate Prices Rise

    • Measured by the Moody’s/RCA Commercial Property Price Index (CPPI), Commercial Real Estate Prices are projected to rise an average of 3.8% per year through 2019.
    • This is a drop from 2016 at 9.1% rise and marginally up from prior forecast.
    • Through March 2017, the CPPI Index is up 7.7% year over year.
    • Industrial properties are up by 10.9% and retail properties have fallen by 1.2%.
  • Modest Rent Growth

    • A modest rent growth is forecast over the next 3 years.
    • A breakdown includes industrial rent growth at 3.8%, office at 2.3%, hotels at 2.3% per available room, retail at 2.2% and apartments at 2%.
    • Forecasts of industrial and retail rent have increased since last fall forecast, however, other property types are flat or down.
Overall, those who responded to the survey raised expectations about economic growth through 2019. Forecasters were reluctant to upgrade real estate fundamentals or returns. This caution is likely due to higher interest rates and new supply. Greater job and income growth are positive for the U.S. real estate markets but uncertainty about future growth remains a concern.