Forecast: Commercial Property Transactions on Course to Reach a Ten-Year High by 2016
By Lew Sichelman for Urban Land Magazine
A new survey by the Urban Land Institute and EY forecasts that activity in the commercial sector will soon reach levels not seen since 2006. The housing sector is also expected to continue its rebound, albeit at a somewhat slower pace than previously predicted.
The latest survey of 39 of the industry’s leading economists and analysts points “to a quirk in history” in which returns are expected to be even across all property types, said John Southard, managing director of CBRE Economic Advisors, during a webinar introducing the semiannual “ULI/EY Real Estate Consensus Forecast.”
No segment of the business is at its peak, said Southard, but none is at its trough either.
“We are in a good place in terms of real estate fundamentals,” said Bill Maher, director of North American investment strategy for LaSalle Investment Management.
The consensus forecast, which is based on the median of participants’ prognoses, is more optimistic than the survey six months earlier. “We should be hitting a lot of milestones,” said Howard Roth, global real estate leader at EY (formerly Ernst & Young).
The survey was undertaken during a three-week period from mid-February to mid-March. The next release is planned for October.
The three-year outlook predicts that commercial property transaction volume will hit $430 billion in 2016, second only to the peak reached in 2007, when $571 billion in sales were recorded. The forecast represents a 20 percent increase from the previous ULI/EY consensus forecast, released in October, when the median estimate of all participants for 2015 was $350 billion, said Anita Kramer, vice president of the ULI Center for Capital Markets and Real Estate.
In what Kramer called “another long-awaited milestone,” commercial property prices are expected to moderate over the next three years, with increases falling to 5.7 percent in 2015 and 2016.
The issuance of commercial mortgage–backed securities (CMBS), a key source of funding for income-producing properties, also is expected to rebound, but issuances will still be well short of the record $229 billion notched in 2007. The forecast is for a steady rise of $20 billion annually, to $140 billion in 2016.
Maher of LaSalle Investment Management said he was surprised the forecasts for volumes were not higher. Higher prices “will bring out the sellers,” he ventured. “A lot of people need to liquidate. I think the market will clear.”
But noting that $430 million in sales is equivalent to 10 percent of the nation’s total commercial real estate stock, seminar participant Doug Poutasse, executive vice president of Bentall Kennedy, said, “That’s a fairly high turnover rate.”
The forecasters also expect the overall economy to continue expanding at a rate equal to the 20-year average. Growth in real gross domestic product (GDP) is expected to hit 2.8 percent this year, then reach 3 percent in each of the two subsequent years. The unemployment rate will continue to slide, slipping to the 20-year average of 6 percent in 2015 and then 5.8 percent in 2016, they predict. And employment will grow by more than 7.5 million jobs over those years.
The participants expect inflation to bump up to 1.9 percent this year, 2.2 percent in 2015, and 2.5 percent in 2015, only slightly higher than the 20-year average of 2.4 percent. The ten-year Treasury rate, a key measure for real estate values, is expected to move up as well, Roth noted, from 3.4 percent this year to 4.4 percent in 2016, just below the 4.5 percent 20-year average.
Although Treasury rates will increase borrowing costs, survey respondents do not expect the increase to have a substantial impact on real estate capitalization rates for institutional-quality investments. The National Council of Real Estate Investment Fiduciaries (NCREIF) capitalization rate is expected to remain at 5.7 percent this year, then rise to 5.9 percent in 2015 and 6.2 percent in 2016.
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