10/28/2021 | by Sarah Borchersen-Keto

Economic fundamentals are expected to post a strong recovery in the next three years, while key commercial real estate metrics, including transaction volume, are similarly poised to rebound, according to the latest semi-annual Urban Land Institute (ULI) Real Estate Economic Forecast.

The survey of 49 economists and analysts at 36 leading real estate organizations was completed Sept. 24 –Oct. 9.

After falling 3.4% in 2020, GDP is projected to bounce back to a growth rate of 5.7% this year, followed by continued growth of 4.0% in 2022. Both of those growth rates would outpace annual growth rates seen from 2010-2019. Growth is forecast to continue in 2023 at a rate of 2.5%.

Net employment growth, down 9.42 million in 2020, is expected to reverse and show growth of 6.0 million jobs in 2021 and 3.7 million jobs in 2022, for total growth just exceeding the number of jobs lost during the pandemic. Further growth of 2.2 million jobs is forecast in 2023. Net of the replacement numbers, average annual new job growth in the forecast period is lower than annual job growth from 2010-2019.

Inflation for 2021 is forecast to hit 4.3% then moderate to 3.0% in 2022 and to 2.4% in 2023, but still remaining above the 20-year average of 2.1%.

Turning to real estate metrics, after falling by 8% in 2020, equity REIT total returns of 27.8% are expected this year, followed by returns of 10% in both 2022 and 2023. That would put REITs on track to outpace total returns for institutional-quality direct real estate investments, as measured by the NCREIF Property Index (NPI). After a modest 1.6% gain in 2020, returns of 8% are expected in 2021, and 7% in both 2022 and 2023.

“The consensus view among real estate economists is that the economic recovery will continue with moderate inflation and moderate interest rates,” said Calvin Schnure, Nareit senior economist and a contributor to the ULI Consensus panel. “REITs are expected to enjoy strong investment returns and outperform private real estate in this environment.”

Other key findings from the ULI survey include:

  • Transaction volume is expected to recover relatively quickly over the forecast period, reaching $600 billion by 2022 and remaining at that level in 2023.
  • Industrial and apartment rent growth from 2021-2023 is expected to stand at an annual average of 4.4% and 4.0%, respectively. Retail rent growth is forecast at an annual average of 1.2% during the forecast period, and office rent growth is forecast at an annual average of -0.2%.
  • CMBS issuance is expected to rebound steadily over the forecast period, reaching $95 billion in 2023, compared with a post-Great Financial Crisis peak in 2019 of $98 billion.