Commercial Real Estate on the Move

ULI: Consensus of Economists Sees Promising CRE Outlook Through 2014

CMBS, Investment Transaction Volume Likely To Jump Sharply As Economy Gains Steam

By Randyl Drummer

March 28, 2012

Even among the stream of positive real estate surveys and forecasts recently, the one issued this week by the Urban Land Institute (ULI) stands out. Expressing the consensus views of 38 leading real estate economists and analysts from across the U.S., ULI reported commercial real estate market conditions and the overall economy is expected to see broad improvement over at least the next two years as the recovery cycle kicks into overdrive and shifts into growth mode.

In other key highlights. the ULI forecast expects CRE transaction volume to increase by nearly 50% over the next three years, while issuance of commercial mortgage-backed securities (CMBS) is expected to more than double. Institutional real estate and real estate investment trusts (REITs) are expected to provide returns ranging from 8.5% to 11% annually through 2014.

Hans Nordby, managing director, and Shaw Lupton, senior real estate economist, for CoStar Group's forecasting and analytics company, Property and Portfolio Research (PPR), were among those consulted on the forecast, which generally dovetail with PPR's baseline forecast for the recovering market over the next three years.

The general theme during a ULI webinar presenting the findings on Wednesday was one of growing confidence that, as ULI Chief Executive Officer Patrick L. Phillips put it, "The U.S. real estate economy has weathered the brunt of the recent financial storm and is poised for significant improvement over the next three years. These results hold much promise for the real estate industry."

According to the consensus, vacancy rates are expected to drop in a range of between 1.2 and 3.7 percentage points for office, retail, and industrial properties and remain stable at low levels for apartments, with rising occupancy also expected for hotels. Rents are expected to increase across the board this year at rates ranging from 0.8% for retail up to 5% for apartments.

On the residential side, housing starts are projected to nearly double by 2014, and home prices will begin to rise in 2013, with prices increasing by 3.5% in 2014.

Although the findings came with a message of caution that geopolitical and global economic events could alter the forecasted growth trajectory, the strong projections are based on a promising outlook for the U.S. economy, with surveyed economists expecting real gross domestic product (GDP) to rise steadily from 2.5% this year to 3.2% in 2014, and unemployment falling to 6.9% by 2014. The heating economy will likely lead to higher inflation and interest rates, raising the cost of borrowing for consumers and investors, however.

ULI conducted the survey, a consensus view that reflects the median forecast for 26 economic indicators, in late February and early March. Comparisons are made on a year-over-year basis from 2009 during the recession through 2014.