ULI Forecast Says Worst U.S. Economic Fears Have Eased
Real Estate In-Depth | November 23, 2020
While the economic impact of the coronavirus this year has been dramatic, two recently released reports indicate that the real estate industry and the U.S. economy are expected to fare better in 2021.
The Urban Land Institute’s latest Real Estate Economic Forecast predicts less of a slump for the rest of this year than was previously expected six months ago and economic growth from 2021-2022.
In a report on global commercial real estate investment, commercial brokerage firm CBRE predicts that as vaccine research forges ahead, a global market normalization is highly anticipated in 2021.
The ULI report predicts that U.S. GDP will decline by 5% in 2020, down from 2.2% in 2019. It is expected to rise 3.6% in 2021 and 3.2% in 2022. This is an increase for 2020 over the May forecast (-6%), but a decrease for 2021 (3.9%) and 2022 (3.6%) Net job growth will drop by 9 million in 2020, a modestly more upbeat assessment over the May projection (10 million jobs lost), but job growth will 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% for 2020, before dropping to 6.6% in 2021 and 5.5% in 2022, below the 20-year average but still well above the 2019 unemployment rate of 3.5%
“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. He added that at the moment leading real estate economists are signaling that resilience and underlying strength will likely win out over uncertainty and risk.
Among some of the real estate and investment prognostications, the ULI report predicts 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% in 2020 (up from a projected -7% in May), stay flat in 2021 (down from 1%) and increase to 4% (down from 5%)
Rent growth expectation for the next three years is projected 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% over 2020-2022, followed by multifamily at .03%, office at -0.5% retail at -2.3%, and hotel revenue per available room (RevPAR) at -3.3% over a three-year period after an initial 35% 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% in 2022, below the 20-year average of 10.2%, and apartments will be at 4.6%, below the average of 5.18%. Office vacancy rates are expected to rise to 14.8% in 2022, above the 20-year average of 14%, and retail availability is expected to be 11.3%, above the 20-year average of 9.7%, the ULI report states.
The CBRE report indicates global commercial real estate investment increased by 23% quarter-over-quarter in the third quarter of this year but was still down by 48% year-over-year. Year-to-date global volume was down by 31% from 2019.
Investors strongly favored industrial and logistics assets. Office assets were less popular in most developed markets but continued to attract significant capital flows in high-growth markets like India.
Americas investment volume increased by 30% quarter-over-quarter to $64 billion, back to the level of 10 years ago. The U.S. accounted for 96% of the region’s investment activity. However, a 59% year-over-year decline in the third quarter and a 44% decline year-to-date in the Americas were the largest among all three global regions.
Activity increased across all property sectors in the third quarter, led by a strong quarter-over-quarter rebound in multifamily investment. With a relatively stable outlook for demand and income, multifamily has been the most popular asset type in the Americas since 2017. On a year-to-date basis, industrial and logistics has the smallest decrease in investment volume at 25%. Pricing of multifamily and industrial assets has recovered quickly as they are sought-after for downturn protection. Investment yield has also remained stable, the CBRE report concluded.
Office, on the other hand, had the smallest (9%) quarter-over-quarter rebound due to continued uncertainty about long-term office usage in urban markets, such as New York and San Francisco. The sector’s share of total investment in the Americas decreased to 23% in the. second and third quarters from 25% in 2019. The hotel and retail sectors were the most severely impacted, with respective 73% and 46% drops in investment volume year-to-date.
The brokerage firm predicts, “Global real estate investment is expected to continue a modest recovery until a COVID-19 vaccine becomes available and is widely distributed. As this is unlikely to occur this year, CBRE estimates that investment will remain relatively weak in the fourth quarter, resulting in a full-year decline of roughly 38%. This is better than the last global recession when global investment fell by 58% in 2008.”
The report went further, predicting, “As vaccine research forges ahead, a global market normalization is highly anticipated in 2021. Interest rates and Treasury yields will stay low, giving commercial real estate an edge on returns. Capital targeting real estate has remained high. Investors who delayed capital deployment this year will look for risk-adjusted opportunities or adopt different strategies in 2021 and beyond.”