Survey Shows Commercial Real Estate Poised For Three Years of Growth

The commercial real estate industry should see at least three more years of sustainable growth, based on a combination of sound economic and property market fundamentals, according to a survey of industry economists.

The forecast from the Urban Land Institute (ULI) Center for Capital Markets and Real Estate, released April 8, shows commercial real estate transaction volume rising to $470 billion this year from $424 billion in 2014, an increase of 11 percent. Volume is projected to climb to $500 billion in both 2016 and 2017, a 6 percent increase from the forecast 2015 level.

The consensus of the 46 economists surveyed was that improving vacancy and occupancy rates will drive “above average rent growth in all commercial real estate sectors,” according to the ULI report.

“A robust labor market benefits all types of commercial property, and despite some monthly noise, job gains have finally turned the corner,” said survey participant Calvin Schnure, NAREIT's senior vice president for research and economic analysis. “2015 could mark an inflection point for real estate, especially the office sector.”

According to the survey results, total returns for institutional-quality direct real estate investments, as measured by the National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index, are expected to average 9.9 percent in the period from 2015 to 2017. That compares with a projected average return of 3 percent for 10-Year U.S. Treasury notes during the same period.

The economists estimate that issuance of commercial mortgage-backed securities (CMBS) will total $115 billion in 2015, $133 billion in 2016 and $150 billion in 2017. In 2014, CMBS issuance was $94 billion.

Real estate lending is expected to remain competitive, according to the survey. “This is good news for the many borrowers with loans coming due over the next three years,” said William Maher, director of North American strategy for LaSalle Investment Management and a survey participant.

Commercial real estate prices as measured by the Moody’s/RCA Index are projected to rise by an average of 7.6 percent per year, compared with a long-term average increase of 5.3 percent, the forecast noted.

Regarding market fundamentals, vacancy rates, rental rates, total returns and product availability for most commercial property sectors are expected to exceed or hold close to 20-year averages for each category.

Warehouse rents and hotel revenue per available room (RevPAR) are expected to be leaders among the major property types, growing by an annual average of 3.6 percent and 5.3 percent respectively in the 2015 to 2017 period.

In the office sector, the forecast predicts that rental rates are forecast to rise by an annual average of 2.5 percent in the 2015 to 2017 period, while retail rental rates are seen rising an average of 2.6 percent annually in the same time frame. Apartment rental rates are forecast to increase an average of 3.1 percent annually between 2015 and 2017.