Economists foresee inflationary rent growth for commercial real estate through 2019, finds Urban Land Institute

by Brianna Crandall — November 13, 2017 — The U.S. commercial real estate industry is, in general, expected to experience moderated growth through much of 2019, according to a new three-year economic forecast from the nonprofit Urban Land Institute (ULI) Center for Capital Markets and Real Estate.

The latest ULI Real Estate Economic Forecast, (formerly the ULI Consensus Forecast), a semi-annual outlook, is based on a survey of 48 of the industry’s top economists and analysts representing 34 of the country’s leading real estate investment, advisory, and research firms and organizations. The survey, conducted in September 2017, provides forecasts for broad economic indicators; real estate capital markets; property investment returns for four property types; vacancy and rental rates for five property types; and housing starts and prices.

The forecast projects relatively high but moderating commercial real estate volumes; continued commercial price appreciation (but at a decelerating rate); rent growth; positive returns (also at lower levels); relatively stable vacancy/occupancy rates for all commercial real estate sectors, and continued growth in single-family housing starts.

ULI leader and survey participant William Maher, director of North American strategy and research at LaSalle Investment Management, stated:

Respondents to the October 2017 ULI Real Estate Economic Forecast downplayed the possibility of a spike in economic growth through 2019. At the same time, they confirmed that the current expansion could become the longest one since records were kept starting in the 19th century. While real estate will benefit from continued growth, US property markets are close to equilibrium, which should result in inflationary rent growth and returns in the single digits for core real estate and equity real estate investment trusts (REITs).

Among the survey’s key findings for commercial real estate:

  • Commercial real estate prices as measured but the Real Capital Analytics (RCA) Commercial Property Price Index (CPPI) is projected to rise by an average of 4% per year over the next three years (5%, 4.1% and 3%, respectively), compared to the prior forecast’s average of 3.9%, and the long-term average increase of 5.6%.
  • Over the next three years, national vacancy or availability rates are forecast to rise modestly for all property types except industrial, which will stay flat. Apartment vacancies are expected to increase from 4.8% to 5.1% in 2019, down from 5.4% in the prior survey. Industrial availability will be 7.9% in 2019, no change from 2016 and well below the long-term average of 10.2%. The office vacancy rate is forecast to increase steadily over the next three years, ending 2019 at 13.4%.  Retail availability is expected to reach 10.3% in 2019.
  • Real estate transaction volumes will fall to $450 billion in 2017, a decline of $46 billion (9%) from the 2016 level.  The 2017 forecast is unchanged from the last two editions. Transaction volume forecasts for 2018 and 2019 are lower than previous, at $427 billion and $414 billion, respectively.
  • Industrial rent growth will lead all property types with 2017-2019 growth averaging 3.7%, followed by hotels at 2.7% revenue-per-available-room (RevPAR) growth; apartments, 2.3%; office, 2%; and retail, 1.7%. Compared to the last forecast, retail rents fell the most (0.6 percentage points) which reflects the elevated levels of retailer bankruptcies and announced store closings.

The ULI Real Estate Economic Forecast is available at no cost from the ULI Web site.

The market survey is the most recent in a series of polls conducted by ULI to gauge sentiment among economists and analysts about the direction of the real estate industry. The next ULI Real Estate Economic Forecast survey is scheduled for release in April 2018.