Survey Forecasts Favorable Real Estate Conditions for Next 3 Years

The commercial real estate market is set to enjoy mostly favorable conditions through 2017, according to the latest three-year consensus forecast from the Urban Land Institute (ULI) Center for Capital Markets and Real Estate.

While the latest semi-annual outlook is slightly less bullish compared with six months ago, the majority of indicators in the forecast signal favorable economic conditions and capital markets in the United States.

“The U.S. economy continues to move forward, albeit not always in a straight line” said Calvin Schnure, NAREIT senior vice president for research and economic analysis and a respondent to the ULI survey. “Improving fundamentals are likely to boost occupancy and rent growth for REITs and commercial real estate markets for the next few years.”

Based on a survey of 48 industry economists and analysts, the semi-annual outlook shows that commercial real estate transaction volume is expected to remain stable at around $500 billion in all three forecast years. The survey found that issuance of commercial mortgage-backed securities (CMBS) is expected to continue to grow steadily through 2017, with projected increases to $110 billion in 2015, $130 billion in 2016 and $140 billion in 2017. CMBS issuance in 2014 stood at $95 billion.

Commercial real estate prices are projected to rise by 10 percent in 2015, but slow to a 6 percent increase in 2016. Price growth is expected to decelerate to 4.5 percent in 2017.

Institutional real estate assets are expected to provide total returns of 11.7 percent in 2015, moderating to 9 percent in 2016 and 7 percent in 2017, according to the survey. Meanwhile, the respondents indicated that returns are expected to be strongest for industrial and retail assets, followed by office and apartments, in all three years. Equity REIT total returns, which posted growth in excess of 30 percent in 2014, are expected to drop to 1 percent in 2015, rising to 6.5 percent in 2016, and 5.5 percent in 2017, according to the survey.

In terms of market fundamentals, the survey found that vacancy rates are expected to continue to decrease modestly for the office and retail sectors over all three forecast years. In the industrial sector, availability rates and hotel occupancy rates are forecasted to improve modestly in 2015 and essentially plateau in 2016 and 2017. The survey respondents are forecasting that apartment vacancy rates will decline in 2015, but rise slightly in 2016 and 2017.

According to respondents, commercial property rents are expected to increase for the four major property types in 2015, ranging from 2 percent for retail up to 4.6 percent for apartments and 4.9 percent for industrial. Rent increases in 2017 in these four property types will range from 2.8 percent for retail to 4 percent for office. Hotel revenue per available room (RevPAR) is expected to increase by 7.9 percent in 2015 and 4.2 percent in 2017.