Economists: CRE Growth Is Slowing... And That's For The Better
Ladies and gentlemen, take off your seatbelts. It’s going to be a smooth, slow ride.
The current cycle is finally cooling down after six years of frenetic growth, judging by the numbers released in the Urban Land Institute’s latest Real Estate Consensus Forecast.
The forecast expects commercial property transaction volume to trend downward over the next three years after its 2015 peak of $534B, reaching $475B by 2018.
Similarly, commercial real estate prices are projected to continue growing but at “subdued and slowing rates” over the next few years, at 5% in 2016, 2.7% in 2017 and 3% in 2018, all below the long-term average of 5.8%.
Returns on commercial real estate follow roughly the same pattern, estimated at 8.1% this year, 7.2% in 2017 and 7.1% in 2018. Vacancy rates are expected to “improve modestly” over the next three years, as are commercial rents.
Just because it’s not as good as years past doesn’t mean it’s bad news, experts say.
Raymond Torto, an economist and lecturer at Harvard’s Graduate School of Design, calls the report a “thoughtful” and “sensible” piece “prepared by some very heavy-duty CRE economists,” and says commercial real estate players should be happy about the picture it paints.
“2015 was a strong year for CRE fundamentals and prices, and to expect the 2015 pace to carry forward into 2016 would be naïve,” he says. “To me the report says: do not be too optimistic, but carry on!”
He says the slow, steady growth predicted in the report is especially attractive given the volatile behavior of the stock market recently.
“Investors allocating between CRE and securities will tend more towards CRE, I think,” he says. Because of that, he thinks there’s even a chance transaction volume, at least, could keep up with last year’s pace in 2016.
Likewise, Steven Moreira, president of the Certified Commercial Investor Member Institute, sees the report as a net positive.
“Slow and steady growth is a comfortable pace for the institutional real estate market,” he says. “If we have moderate growth with lower velocity, we may not see the stock market whipsaw as much as it has in Q1 2016.”
Steve previously told Bisnow he expected the CRE market's strong fundamentals to protect it from the volatility seen lately in financial markets.
He expects multifamily to be the preferred asset class in the years ahead, but says retail is well-positioned as well, assuming gas prices stay low and job growth remains steady.
The ULI forecast expects retail availability rates to plateau at 10.7% in 2018 and apartment vacancy rates to rise slightly until they hit 5.4% in 2018. Both rates are above their 20-year averages.
Christopher Thornberg, an economist and founding partner at Beacon Economics, also calls the report’s estimates “a pretty solid outlook” overall.
The numbers “make sense, after all, property values have been rushing to keep up with falling rates, but now that rates have bottomed out, price appreciation is cooling off,” he says.
He says the leveling off predicted by the report will help to avoid another real estate bubble, an outcome far worse than slightly slower growth.