The Urban Land Institute’s (ULI) latest Real Estate Economic Forecast predicts economic growth from 2021-2022, and less of a slump for the rest of this year than was previously expected six months ago.
The ULI report’s conclusions are based on a September-October survey of 43 economists and analysts at 37 leading real estate organizations. The sentiment of the group indicated that the recovery would rebound in 2021 and be even more positive in 2022, though that varies by sector. The current recession is expected to be short-lived, analysts note, and real estate market conditions and values are forecast to hold up much better than predicted six months earlier, with industrial real estate and single-family housing expected to perform best.
“The fall survey provides generally good news about the U.S. economy and real estate markets, particularly compared with the spring survey,” said William Maher, principal, Maher Strategies. “The worst fears of earlier this year have mostly eased. Several survey respondents pointed out the inherent difficulty of forecasting given the many unknowns related to the coronavirus pandemic. Others pointed to further uncertainty due to the upcoming national election, with big differences in tax policies between the two main presidential candidates. But as of now, leading real estate economists are signaling that resilience and underlying strength will likely win out over uncertainty and risk.”
The survey results were released today during a ULI member-only webinar that also featured observations from Jeanette Rice, America’s head of multifamily research, CBRE; Tim Wang, managing director and head of investment research, Clarion Partners LLC; Richard Kleinman, managing director of research & strategy, LaSalle Investment Management; and Adam Ruggerio, managing director and head of client solutions, Metlife Investment Management.
Predictions from the semi-annual survey, which covers the forecast period of 2020 through 2022, include the following:
– U.S. GDP will decline by 5 percent in 2020, down from 2.2 percent in 2019. It is expected to rise 3.6 percent in 2021 and 3.2 percent in 2022. This is an increase for 2020 over the May forecast (-6 percent), but a decrease for 2021 (3.9 percent) and 2022 (3.6 percent)/
– Net job growth will drop by 9 million in 2020, a modestly more upbeat assessment over the May projection (10 million jobs lost), but increase by 3.5 million in 2021 (vs 4 million in the May survey) and 3 million in 2022 (vs 4 million in May) for a three-year total of -2.5 million jobs. The national unemployment rate is forecast to be at 8 percent for 2020, before dropping to 6.6 percent in 2021 and 5.5 percent in 2022, below the 20-year average but still well above the 2019 unemployment rate of 3.5 percent.
– Expected yields on the 10-Year U.S. Treasury note are expected to remain at the same level of the forecast six months ago (0.8 percent) in 2020, before slightly rising to 1 percent in 2021 and 1.5 percent in 2022. The latter two years are down from the May survey, falling from 1.3 percent and 1.7 percent, respectively.
– Real estate transaction volumes are expected to begin rising in 2021, though not near the levels seen at the end of 2019. 2020 is forecast to see $300 billion in volume (up from the May forecast of $275 billion), $400 billion in 2021 (equal to May) and $500 billion in 2022 (also equal to May). Expectations for annual CMBS issuance rose in the survey to $50 billion (vs projected $45 billion in May), with 2021 expected to see $60 billion (equal to May forecast) and 2022 expected to see $83 billion (up from $80 billion in May forecast), which would exceed the 20-year average of $81.5 billion.
– Commercial real estate price growth as measured by the Moody’s RCA Commercial Property Price Index (CPPI) is expected to drop by 2 percent in 2020 (up from a projected -7 percent in May), stay flat in 2021 (down from 1 percent) and increase to 4 percent (down from 5 percent).
– Rent growth expectation for the next three years is expected to stay either negative or middling, except for industrial which will remain robust. Industrial rental growth will lead all property types with an average of 2.1 percent over 2020-2022, followed by multifamily at .03 percent, office at -0.5 percent retail at -2.3 percent, and hotel revenue per available room (RevPAR) at -3.3 percent over a three-year period after an initial 35 percent drop in the first year.
– National vacancy and availability rates are expected to be below the 20-year average for industrial and apartments, but above average for office and retail. Industrial availability rates will be at 7.3 percent in 2022, below the 20-year average of 10.2 percent, and apartments will be at 4.6 percent, below the average of 5.18 percent. Office vacancy rates are expected to rise to 14.8 percent in 2022, above the 20-year average of 14 percent, and retail availability is expected to be 11.3 percent, above the 20-year average of 9.7 percent.
– The forecast for real estate returns as measured by the National Council of Real Estate Investment Fiduciaries (NCRIEF) Property Index are higher in 2020 than the prior update, but lower for the latter two years. Total returns are forecast at -1.7 percent, 3.0 percent and 5.6 percent for 2020, 2021 and 2022, respectively. Industrial again will lead all property types, with an average return of 6.9 percent through 2022, and returns for other property types will average 3.3 percent for apartment, 0.9 percent for office and -4 percent for retail.
– Real estate economists believe that equity real estate investment trusts (REIT) returns will rise, though not at the level seen at the end of 2019. The National Association of Real Estate Investment Trusts (NAREIT) total return composite is forecast to average 0.8 percent from 2020-2022.The single-family housing construction outlook looks surprisingly strong over the next six months. Unit starts are forecast to fall slightly to 871,250 in 2020 before rising to 940,000 in 2021 and 975,000 in 2022. Home price growth is expected to average 4.1 percent over the next three years.