Survey of 39 Leading Economists Shows Marked Shift from March 2012
WASHINGTON (September 26, 2012) – A new Urban Land Institute (ULI) survey of 39 leading real estate economists and analysts from across the United States reflects scaled-back expectations for growth in the nation’s economy, real estate capital markets, and commercial real estate fundamentals, but more robust projections for single-family housing than were made six months ago. The findings were released today in the institute’s semi-annual ULI Real Estate Consensus Forecast, prepared by the ULI Center for Capital Markets and Real Estate.
The survey, conducted between August 21 and September 14, is the second in ULI’s new series of surveys of economists and analysts; the first one was released last March. According to the latest forecast, the real gross domestic product (GDP) is expected to rise by 2 percent this year, stay at 2 percent in 2013, and then rise by 2.9 percent in 2014; while the nation’s unemployment rate is expected to fall from 8.1 percent to 7.8 percent to 7.0 percent during that time. The number of jobs created is expected to rise from 1.8 million in 2012 to 2 million in 2013, and then rise to 2.4 million in 2014. All of these forecasts are considerably less optimistic than those of six months ago.
Predictions for commercial real estate activity were also scaled back by as much as 20 percent from the March survey. Transaction volume in 2012 is expected to slip to $223 billion from $227 billion in 2011, before rising to $250 billion in 2013 and $275 billion in 2014. The issuance of commercial mortgage-backed securities, a key source of financing for commercial real estate, is expected to rise marginally to $35 billion in 2012 from $33 billion in 2011 before rising to $45 billion in 2013, and then $60 billion in 2014.
Total returns for equity real estate investment trusts (REITs) are expected to be 15 percent in 2012, then moderate to 10 percent for 2013 and 2014. While these reflect a sharp decline from the surging REIT returns of 28 percent in both 2009 and 2010, the forecast suggests that returns will likely settle 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 10 percent in 2012, and 8.5 percent in both 2013 and 2014, a downward trend from the past two years, but close to long-term historical averages.
The survey indicates that while economic growth will be steady, it will be slow, and subject to continued uncertainty over Europe’s debt crisis, the outcome of the presidential and congressional elections in the U.S., and the complexities of tighter financial regulations in the U.S. and abroad, said ULI Senior Vice President Dean Schwanke, executive director of the ULI Center for Capital Markets and Real Estate. “What this survey suggests is that, in general, the U.S. economy is making progress inch by inch. Nothing indicates a quick turnaround, but the economy and the real estate industry are moving toward a notable improvement by 2014.”
As was the case with the March survey, the new survey anticipates cooling in the apartment sector, with returns expected to continue dropping from the high point of 18.2 percent reached in 2010. By property type, total returns in 2012 are expected to be strongest for retail, at 11.4 percent; followed by apartments, at 11.1 percent; industrial, at 10.4 percent; and office, at 9.4 percent. By 2014, however, returns are expected to be strongest for industrial, at 8.9 percent, and office, at 8.7 percent; followed by retail, at 8.0 percent; and apartments, at 7.8 percent.
- Apartments – The forecast predicts that vacancy rates will drop to 4.7 percent this year and hold at that rate through 2013 before rising slightly to 4.9 percent in 2014. This year, rental growth rates will hold at 4.8 percent before dropping to 3.5 percent in 2013 and 3.0 percent in 2014. This decline in rent increases reflects supply catching up with demand, as more units are placed on the market.
- Office – The survey’s predictions for office vacancy rates are less optimistic than six months ago, reflecting the more modest expectations for employment. Vacancy rates are expected to drop slightly from last year to 15.5 percent in 2012, dropping only to 14.8 percent in 2013, and 14.0 percent by the end of 2014. Marginal increases are forecast for office rental rates, with a rise of 2.5 percent expected for 2012, 3.1 percent in 2013, and 4.0 percent in 2014.
- Retail – While retail vacancy rates remain high, this sector should see some modest improvements as the economy improves and consumer spending increases. Following years of rising vacancies, vacancy rates are expected to tighten to 12.9% by the end of 2012, 12.5% by 2013, and 12.2% by 2014. Retail rental rates are projected to remain flat in 2012, then increase in 2013 to 1.2 percent, and to 2.5 percent in 2014.
- Industrial/warehouse — Vacancy rates are expected to continue declining to 13.0 percent by the end of 2012, 12.4 percent in 2013, and 11.9 percent by the end of 2014. Warehouse rental rates are expected to show growing strength, with an increase of 2.0 percent anticipated for 2012, 2.5 percent in 2013, and 3.1 percent in 2014.
The September survey shows significantly more optimism about the single-family housing industry than was shown six months ago. Single-family housing starts, which have been near record lows over the past three years, are projected to reach 530,000 in 2012 (a 30,000-increase from the March survey projections), and then rise to 675,000 in 2013, and 800,000 in 2014. The national average home price is expected to rise by 3.2 percent this year, and then rise by 3.9 percent in 2013 and by 5.0 percent in 2014 – far above the March predictions. The forecast suggests that a housing recovery is underway, as consumers sense a tipping point, and, drawn by low mortgage rates, return to the market.
The forecast anticipates continued low inflation and low interest rates, reflecting still-sluggish economic growth, and recent actions and policy guidance from the Federal Reserve Board. For 2012, it predicts that the Consumer Price Index (CPI) will drop to 1.9 percent , then rise slightly to 2 percent in 2013 and 3 percent by the end of 2014. Ten-year treasury rates are also projected to decline to 1.8 percent this year, before rising to 2.3 percent by the end of 2013 and to 3.0 percent by the end of 2014. The report points out that a continuation of low interest rates is easing concerns over rising real estate capitalization rates, which bodes well for commercial real estate values.
The ULI Real Estate Consensus Forecast reflects consensus reached on 26 economic indicators, including property transaction volumes and issuance of commercial mortgage-backed securities; property investment returns, vacancy rates and rents for several property sectors; and housing starts and home prices. Comparisons are made on a year-by-year basis from 2009, when the nation was in the throes of recession, through 2014. The next forecast is scheduled for release in March 2013.
NOTE TO REPORTERS AND EDITORS: The survey results were discussed today during a ULI webinar featuring three ULI leaders who participated in the survey: Douglas Poutasse, executive vice president, Bentall Kennedy, Boston; Jon Southard, managing director, CBRE Econometric Advisors, Boston; and Jim Clayton, vice president of research, Cornerstone Real Estate Advisers, Hartford, Conn. To request an interview with the webinar participants, contact Trish Riggs, vice president, ULI communications, at 202-624-7086. The survey results and an archived version of the webinar are available at uli.org/capitalmarkets.
About the Urban Land Institute
The Urban Land Institute (uli.org) is a nonprofit education and research institute supported by its members. Its mission is to provide leadership in the responsible use of land and in sustaining and creating thriving communities worldwide. Established in 1936, the Institute has nearly 30,000 members representing all aspects of land use and development disciplines.
About the ULI Center for Capital Markets and Real Estate
The ULI Center for Capital Markets and Real Estate (uli.org/capitalmarkets) focuses on real estate finance, real estate industry and investment trends, and the relationship between the capital markets and real estate. The Center is engaged in a variety of projects including the annual Emerging Trends in Real Estate® reports, the monthly ULI Real Estate Business Barometer, the annual ULI Real Estate Capital Markets Conference, and numerous other programs.