WASHINGTON, DC—The macro numbers keep trending upward in the latest edition of the ULI/EY Real Estate Consensus Forecast, in terms of both the three-year projections of 39 economists and analysts at leading real estate organizations and the improvement in those projections compared to six months ago. Commercial real estate transaction volume, for instance, is now projected to reach $400 billion this year; last October’s edition of the forecast predicted $330 billion for 2014.
Similarly, the consensus predictions for GDP growth, US unemployment, CMBS issuance and NCREIF total annual returns all look better now than they did late last summer, along with key metrics for vacancy rates and rental growth in specific commercial property sectors. In particular, said EY’s global real estate leader, Howard Roth, who moderated a webinar presented Tuesday by the Urban Land Institute and EY, real GDP growth over the next three years is projected to be “pretty robust,” with annual gains better than in any year since 2005.
The consensus overall is for the economy to grow at a rate consistent with the 20-year average. Sixty-seven percent of the webinar’s attendees concurred, calling the forecast’s level of optimism “just right” in a poll question during the webcast, with 28% opining that it was too optimistic and the remainder saying it wasn’t optimistic enough.
However, Jon Southard, principal and director of forecasting at CBRE Econometric Advisors and one of a three-member panel of experts during Tuesday’s webinar, sounded a note of caution Tuesday during Tuesday’s one-hour webinar. While broadly agreeing with experts’ three-year forecast for recovery and growth, Southard pointed out that “It’s very unlikely that it will be smooth and steady over those three years.”
That’s in keeping with the hiccups in GDP growth over the past couple of years due largely to unanticipated world events, or what fellow panelist Doug Poutasse, EVP and head of strategy at Bentall Kennedy, called “periods of interruption to the recovery.”
Nor are we likely to see sharp upward movement in any of the metrics over the three-year period. Transaction volume for this year is expected to grow better than 10% from the actual $355-billion total in 2013; thereafter, the increases will be more gradual, said Anita Kramer, VP of the ULI Center for Capital Markets and Real Estate, who co-moderated the webinar along with Roth.
This year’s expected $400-billion total will be followed by a 2015 tally of $420 billion and then $430 billion in 2016, Kramer said. All three years are expected to produce more annual volume than we’ve seen since the downturn, but the 12-month total for each year will fall short of the $571 billion transacted in 2007.
Similarly, the Moody’s/RCA Commercial Property Price Index will surpass the previous peak in three years, according to the consensus. However, pricing will increase more gradually, not exceeding 7% annually over any of the next three years, whereas the gains have averaged better than 11% per year since prices bottomed out in 2009.
And new CMBS, having undergone what Kramer termed an “almost biblical” resurrection from its moribund state following the capital markets crash, will continue growing over the next three years, hitting $100 billion for this year, $120 billion next year and $140 billion by the end of ’16. Yet the projected totals, while better than the $88 billion and $100 billion projections six months ago for ’14 and ’15, again show the increases tapering off on a percentage basis.
Furthermore, panelists made it clear that even as the recovery continues, there are still macroeconomic issues to be resolved. US employment growth has averaged better than two million per year in each of the past three years and is projected to average better than 2.5 million over each of the next three, yet panelist Bill Maher, director of North American investment strategy at LaSalle Investment Management, noted that the quality of the new jobs is “not great.” As a result, he said Tuesday, “we’re not seeing the corporate hiring” that drives improvements in CRE metrics, office demand in particular.