ULI Forecast: Three More Years of Stable Growth

WASHINGTON, DC—A consensus of 43 industry economists and analysts calls for “three more years of fairly stable conditions” for real estate, the Urban Land Institute's Anita Kramer said Wednesday. SVP of the ULI Center for Capital Markets  and Real estate, Kramer offered this summation as part of a one-hour webinar presenting the latest edition of the semi-annual ULI Real Estate Consensus Forecast, charting the outlook through 2017.

That outlook calls for steady, sustainable growth, with analysts revising their October 2014 projections upward in all but one indicator, Kramer said. Among the most favorable trends, net job growth is projected at 2.9 million per year, compared to a long-term average of 1.2 million new jobs annually. This will bring the unemployment rate from its present 5.5% down to 5% by the end of '17, according to the forecast. Meanwhile, GDP growth will increase to a sustainable 3% this year and next and 2.8% in '17, albeit not reaching the peak of 3.8% seen in 2004.

Commercial property sales and pricing both are expected to continue on their present upward course. ULI's consensus calls for domestic investment sales to reach $470 billion this year and $500 billion during both 2016 and '17. Prices as measured by the Moody's/Real Capital Analytics index are projected to rise by an average of 7.6% per year over the next three years. That compares to a long-term average increase of 5.3%.

In terms of real estate performance, the ULI consensus projects the total return rate for core unleveraged properties, as measured by the National Council of Real Estate Investment Fiduciaries, to average 9.9% per year, significantly higher than the expected average yield for US Treasuries. Accordingly, NCREIF returns for individual property sectors are also expected to rise, accompanied by further improvements in the fundamentals for these property types.

The one metric on which ULI's consensus group was less optimistic than they were six months ago was single-family housing starts. Although the consensus estimate released Wednesday still calls for more starts than the single-family sector saw last year, the new projections are for 700,000 starts this year and 815,000 in '16, compared to a projected 800,000 and 912,500, respectively, last October.

Additionally, ULI leader William Maher, director of North American strategy for LaSalle Investment Management in Baltimore, sees some areas of concern. namely the likelihood of higher short-term rates squeezing investment returns and causing an increase in capitalization rates. ULI's consensus calls for the NCREIF cap rate to rise steadily from 5.3% this year to 5.9% by  the end of '17, which is “consistent with higher interest rates and borrowing costs,” says Maher.. 

On balance, however, “almost all US real estate participants would be very pleased if the future unfolded as predicted by the ULI consensus forecast,” Maher says. Webinar attendees evidently agreed, with 72% saying the forecast's level of optimism was “just right.”