As overall U.S. commercial transaction volumes and returns begin to normalize again
According to the Urban Land Institute's recently released semi-annual real estate forecast, a building consensus of 40 of the nation's economists and industry analysts sees light at the end of the tunnel for the U.S. commercial sector through 2023.
"The U.S .economy remains relatively attractive for real estate, especially in contrast with the period immediately following the global economic downturn in 2008/9," said Ed Walter, ULI Global CEO. "While prolonged high inflation could damage the viability of pipeline projects, the short-term spike predicted should have less impact. This is why we see transaction volumes recovering so quickly and investment returns for core property types looking so healthy. The real estate sector is in a strong position to build its way out of the pandemic and take the economy with it."
GDP growth for 2021 is revised down from the Spring 2021 forecast of 6.5% to 5.7%, still more than double the bounce back seen in 2010. Longer term forecasts remain stable, falling in 2023 to 2.5% which is still above the 20-year average of 1.73% and close to 2019 levels of 2.3%.
Inflation forecasts for 2021 have risen substantially from a projection of 2.8% in Spring 2021 to 4.3% in the Fall. The forecast is optimistic about this spike receding rapidly to near 2019 levels in 2023.
US interest rates are expected to climb gradually from 0.93% in 2020 to a projected 1.6% in 2021 and reaching 2.25% in 2023. These are lower levels than forecast in Spring 2021 and remain comfortably below the 20-year average of 3.07%.
Expected returns from real estate are fairly stable year on year and show little departure from Spring 2021's forecasts. The National Council of Real Estate Investment Fiduciaries (NCREIF) capitalization rate is expected to fall slightly from 4.4% in 2020 to 4.3% for 2021 and 2022, reaching a floor before showing signs of the start of an upward movement in 2023.
For capital markets, the forecast shows growing optimism about commercial real estate transaction volumes in the next three years with forecasts falling just short of 2019's peak of $617 billion. $515 billion in transactions are estimated for 2021 and then temporarily reaching $600 in 2022 and remaining there 2023. Issuance of Commercial Mortgage-Backed Securities (CMBS) is likewise expected to rise almost to the 2019 peak of $98 billion, climbing from a forecast $80 billion for 2021 to $95 billion for 2023.
Pricing and returns show a leap in expectations compared with just six months ago. The RCA Commercial Property Price Index shows one of the most pronounced changes in expectations since the Spring. 2021's index is now expected to see a peak of 10%, almost doubling the 5.3% growth seen in 2020 and the 4.2% forecast for 2021 just six months earlier in the spring.
Total annual returns for equity REITs are forecast to soar to 27.8% in 2021, topping 2019's performance of 26%. The forecast comes close to the 2014 peak of 30.1% and almost doubles the spring 2021 forecast of 15.0%. At 10% annually, the forecasts for 2022 and 2023 fall back to closer to the 20-year average of 11.3%.
Expectations of NCREIF annual returns are similarly buoyant, with the forecast for 2021 rising from 4.5% in the spring to 8.0% now. Returns are projected to fall slightly in subsequent years to a steady 7.0%. Expectations are up since the Spring 2021 Forecast for four core property types in 2021 and 2022, while being revised downwards for offices and retail in 2023. Industrials are forecast to spike at a 10-year high of 16.0% in 2021 while apartments should reach a more gradual peak of 7.8% in 2022. Office returns are projected to recover to 5.0% in 2023, still short of 2019's 6.6%, and retail to 4.3% in 2023 from a low forecast of 2.0% for 2021.
The average home price change is expected to revert to around 2019 levels from 2022 after a two-year spike from 2020 to 2021. From a high of 11.6% in 2020, the growth is projected to moderate to 10.9% in 2021 and then more significantly to 6.4% in 2022 and 5.0% in 2023. An expected continuing rise in supply is partly responsible, with forecast new housing starts climbing steadily from 1,130,000 in 2021 to 1,250,000 in 2023.
In vacancy rates, the big change is expected to be a rise of 200 basis points (bps) in offices in 2021, with only slight improvement by 2023. The high vacancy rate in offices in 2021 is reflected in a projected fall in rental rates of 1.5%. Industrial and multifamily show healthier levels of rent growth, both with three-year forecasts peaking at 5% in 2021. For warehouses, this comes alongside a projection of relatively stable levels of availability. Office vacancy rates are expected to reach a ten-year high of 16.9% annually in 2021 and 2022.
The ULI Report concludes with there is little good news for the hotel sector in the projections this Fall. Hotel Revenue per Available Room (RevPAR) sees one of the starkest numbers in ULI's whole presentation following a 47.4% fall recorded in 2020. Investors might be pleased to see a forecast peak of 12.2% in 2022, even if that is lower than the 20.0% forecast made in Spring 2021. The forecast for 2021 has collapsed from 29.6% made in the Spring to just 5.0% now.