Economy, real estate to moderate say economists, analysts

There are some mixed fortunes ahead for the US economy and real estate investment over the coming years but moderation is certainly a theme.

A panel of leading economists and industry analysts have participated in a survey conducted by the Urban Land Institute and given their forecasts for the coming three years.

Real estate prices are expected to continue to ease from the heat of recent years with prices in 2020 and 2021 falling below the long-term average growth rate for the first time since 2011.

“Overall, expectations for 2019 and 2020 are flat to up, while the newly introduced 2021 forecast calls for slower growth and returns,” said William Maher, head of research and strategy for LaSalle Investment Management and a survey participant. “Moderating growth in gross domestic product and jobs growth for 2019 to 2021 should lead to slower but still positive real estate demand and absorption.”

For the wider economy, real GDP growth is forecast to moderate to 2.3% in 2019, and plateau at 1.8% in both 2020 and 2021, compared to the long-term average of 2.2 percent.

This is less optimistic than the forecast six months ago for 2019, but more optimistic for 2020.

Survey highlights

• Transaction volume is projected to moderate from $562 billion in 2018, the second highest post-recession annual volume, to $535 billion in 2019 and $500 billion in 2020. Despite these projected declines, volumes remain substantially above the 18-year average of $327 billion.
• Commercial real estate prices are projected to grow at slowing rates relative to recent years, at 5.0 percent in ‘19, 3.7 percent in ’20, and 2.8 percent in ‘21, with the latter two years falling below the long-term average growth rate of 4.4 percent for the first time since 2011.
• Institutional real estate assets are expected to provide total returns of 6 percent in ‘19, moderating to 5 percent in both ‘20 and ‘21. By property type, 2019 returns are forecast to range from industrial’s 10.3 percent to retail’s 2.9 percent. In ‘21, returns are forecast to range from industrial’s 7.0 percent to retail’s 3.8 percent.
• Industrial – Availability rates for the industrial and warehouse sector declined for the ninth straight year in 2018, and economists expect them to reach a new post-recession low of 6.9 percent in 2019 before rising to 7 percent in 2020 and 7.1 percent in 2021. This is still well below the 20-year average of 10.1 percent. Forecasts are for healthy but moderating rental rate growth the next three years. Compared to the forecast from six months ago, the forecasts for both industrial/warehouse availability rates and the rental rate growth are more optimistic in 2019 and 2020.
• Apartment – The apartment sector has continued to perform very well, with vacancy rates decreasing from 7 percent in 2009 to 4.5 percent in 2018. Vacancy rates are expected to increase slightly each year of the forecast period, to 4.6 percent in 2019, 4.8 percent in 2020 and 4.9 percent in 2021, which are still all below the long-term average of 5.2 percent. Rental rate growth, which was 2.8 percent in 2018, will moderate to 2.2 percent by the end of the forecast period, below the long-term average of 2.4 percent. Compared to six months ago, the forecasts for vacancy and rental rate growth are more optimistic for both 2019 and 2020.
• Office – Office vacancy rates reversed a seven-year decline in 2017, ticking up to 13 percent before going back down to 12.6 percent in 2018. Rates are forecast to edge down to 12.5 percent in 2019 before reversing direction and increasing to 12.8 percent in 2020 and 13 percent in 2021. These rates still remain below the 20-year average of 13.9 percent. Rental rate growth is expected to drop over the next three years. Compared to six months ago, the forecast for both office vacancy rates and the office rental rate change are more optimistic for both 2019 and 2020.
• Retail – Retail availability rates were at 9 percent in 2018, which is the lowest post-recession rate, tied with 2016. Survey respondents anticipate slight increases each year of the forecast, inching up from 9.1 percent in 2019 to 9.2 percent in 2020 and 9.4 percent in 2021. Rental rate growth is expected to moderate from its 2018 level of 2.4 percent to 1 percent by the end of the forecast period. Compared to six months ago, the forecast for retail availability rates is more optimistic for both 2019 and 2020, while the forecast for retail rental rate growth is less optimistic for 2019 and more optimistic for 2020.
• Hotel – Hotel occupancy rates have been steadily improving since 2009, reaching 66.2 percent in 2018, above the 20-year average. Rates are forecast to remain strong over the next three years, staying level at 66.2 percent in 2019, before moderating slightly to 65.9 percent in 2020 and 65.7 percent in 2021. Hotel revenue per available room (RevPAR) growth was 2.9 percent in 2018, and is expected to moderate steadily over the next three years, reaching 1 percent in 2021. Compared to the forecast six months ago, the current forecast for occupancy rates is more optimistic for both 2019 and 2020, while RevPAR growth is unchanged in 2019 and more optimistic for 2020.
• Single-family – Growth in single family housing starts is expected to continue in 2019 but remains below the long-term average, increasing to 900,000 in 2019 before moderating down to 888,500 in 2020 and 850,000 in 2021. Price growth is expected to moderate during the next three years from 5.6 percent in 2018 to 2.8 percent in 2021. Compared to six months ago, forecasts for both housing starts and existing house price growth are less optimistic for both 2019 and 2020.