Survey Shows Commercial Real Estate Markets Continuing to Firm

Commercial real estate markets are expected to continue to firm in the next three years, albeit possibly not as robustly as during the past three, according to a recent survey of industry economists.

The consensus outlook of 51 economists and analysts from leading real estate organizations, conducted by the Urban Land Institute (ULI) Center for Capital Markets and Real Estate, anticipates that vacancy rates will remain low and may move lower, supporting further gains in both rents and property prices.

The apartment vacancy rate is expected to be stable near its recent historical lows, while vacancy rates in the office, industrial and retail sectors are projected to edge down.

The survey does show some slowing, though, with commercial real estate transaction volume expected to decline about 21 percent from its post-recession high of $545 billion in 2015 to $428 billion in 2018. 

According to respondents, lower transactions volumes are likely to be accompanied by a subdued issuance of commercial mortgage-backed securities (CMBS). The survey showed that total issuance, which reached $101 billion in 2015, is expected to decline in 2016 to $70 billion before recovering in 2017 and reaching $90 billion in 2018.

Commercial real estate prices are projected to decelerate as well, with increases slowing to 5.0 percent in 2016, 4.0 percent in 2017 and 2.5 percent in 2018, all below the long-term average growth rate of 5.7 percent.

The outlook for steady, subdued gains in underlying fundamentals bodes well for the Equity REITs, according to Calvin Schnure, NAREIT’s senior vice president for research and economic analysis and a participant in the ULI Survey.

“Continued job growth is supporting low vacancy rates and rising rents and property prices. That’s a recipe for a longer expansion in real estate, generating REIT earnings growth and REIT equity market returns in the years ahead,” Schnure said.