ULI Real Estate Economic Forecast Sees REIT Returns Down 18% in 2020 But Rallying in 2021 and 2022

The Urban Land Institute’s latest Real Estate Economic Forecast points to REIT returns averaging minus 18% in 2020 but rallying in both 2021 and 2022 with returns of 10%.

The conclusions are based on a May 2020 survey of 39 economists and analysts at 35 leading real estate organizations, including Nareit Senior Economist Calvin Schnure.

The ULI survey sees a short-lived recession and above average GDP growth in 2021 and 2022. U.S. GDP is expected to fall by 6% this year—the largest single year decline since 1946. However, GDP is expected to grow 3.9% in 2021 and 3.6% in 2022, both well above the long-term average of 2.1%.

The economists and analysts surveyed predicted that the impact on real estate market conditions and values will be much less severe than the 2008 financial crisis—with the exceptions of retail and hotels— but the unknowns of the global pandemic temper their expectations.

“Leading U.S. real estate economists expect that while the top-line economic impact of COVID-19 will be much worse than the global financial crisis, U.S. real estate market fundamentals and values will fare much better compared to that era,” noted ULI leading member William Maher, retired former director of Americas strategy and research at LaSalle Investment Management.

The other conclusions of the survey include:

· Net job growth estimated at negative 10 million for 2020 and 4 million net jobs in each of the following two years;

· U.S. employment estimated at 11.3% at the end of 2020, with a decline to 5.9% by the end of 2022;

· Yields on 10-year U.S. Treasury notes are expected to stay very low this year and gradually increase, while remaining below long-term averages;

· Real estate transaction volumes will likely decrease to $275 billion in 2020, but volumes over the next two years show a much healthier capital market than the one during the 2008 financial crisis; and

· Rent growth for the next three years is expected to be led by the industrial sector, averaging 2.2% from 2020-2022. Apartment rents will fall by 2% in 2020 but have an overall three-year positive average of 1%. All other major property types are expected to have negative growth over the next three year period.

“REITs reduced leverage by raising hundreds of billions in equity capital over the past decade, giving them the financial strength to meet the challenges posed by the COVID-19 crisis,” said Nareit Senior Economist Calvin Schnure.