The U.S. commercial real estate industry is expected to remain on a sustainable course of solid growth for the next three years, according to new three-year forecast – but it also predicts the likelihood that higher short-term rates will squeeze investment returns and cause an increase in cap rates.
Respondents to the survey, published last week by the Urban Land Institute (ULI) Center for Capital Markets and Real Estate, said they expect that cap rates to rise steadily, from 5.3 per cent in 2015 to 5.9 per cent by 2017.
“This is consistent with higher interest rates and borrowing costs,” noted ULI leader, William Maher, director of North American strategy for LaSalle Investment Management in Baltimore.
The new forecast is based on a survey of 46 of the industry’s top economists and analysts representing 33 of the country’s leading real estate investment, advisory, and research firms and organizations.
The findings include:
- Net job growth is expected to be 2.9 million per year, compared to a long-term average of 1.2 million. Demand for real estate, particularly office and apartments, will remain strong. Low unemployment rates should lead to healthy wage growth, although shortages of skilled workers may surface.
- The rate for 10-year U.S. Treasury notes will average three per cent over the three-year period, lower than the long-term average of 4.1 pe rcent, but rising significantly over the forecast period.
- Issuance of commercial mortgage-backed securities is expected to rise to $150 billion in 2017 (rising from $115 billion in 2015 and $133 billion in 2016). With banks and insurance companies also active, real estate lending will remain competitive and favorable for borrowers.
- Commercial real estate prices as measured by the Moody’s/RCA Index are projected to rise by an average of 7.6 per cent per year, compared to a long-term average increase of 5.3 per cent, implying three very strong years of net appreciation for U.S. real estate.
“In summary, almost all U.S. real estate participants would be very pleased if the future unfolded as predicted by the ULI consensus forecast,” said Maher.
“The forecast represents almost the perfect combination of strong economic and property market fundamentals, combined with an orderly wind-down of monetary stimulus.”
Predictions for single-family housing suggest that the residential sector remains in recovery mode. Survey respondents expect housing starts to rise from 647,400 in 2014 to 700,000 in 2015, 815,000 in 2016 and 900,000 by the end of 2017. The average price for existing homes in the U.S. is expected to rise by 5.0 percent in 2015, 4.0 percent in 2016 and 4.0 percent in 2017.
The market survey, conducted last month, is the seventh in a series of polls conducted by ULI to gauge sentiment among economists and analysts about the direction of the real estate industry. The next forecast is scheduled for release during October 2015.