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ULI Real Estate Forecast: Slow-Growth Era Approaching

(By Dale King) WASHINGTON, D.C. – If slow and steady is the formula for winning races, America’s real estate market will likely break a few finish line tapes in the closing years of this decade. But a general slowdown in market growth may be part of the economic order for the next few years.

The Urban Land Institute (ULI) used a media webinar on Tuesday to release its latest Real Estate Market Consensus Forecast. It points to continued economic expansion over the next three years, but at a slower pace than in past years. The ULI report, issued twice each year, compiled responses from 51 real estate economists and analysts during September and October.

Other parts of the market may also progress at snail-like speed. “Compared to six months ago, survey respondents have also reduced their expectations about interest rates, housing starts and private real estate returns,” says a press release issued after the hour-long panel discussion of near- and long-term projections.

Commercial transaction volume “will likely decline during the next three years to $428 billion in 2018,” the survey reports. In addition, “issuance of commercial mortgage-backed securities (CMBS), a key source of financing for commercial real estate which had grown consistently since 2009 to $101 billion in 2015, is expected to decline in 2016 to $70 billion before resuming growth in 2017 and reaching $90 billion in 2018.”

Despite some less-than-optimistic findings, the Consensus Forecast does include a more positive outlook for the industrial sector, with forecasts of lower availability, higher rents and stronger returns.

In addition, as was predicted six and 12 months ago, there are no expectations of a recession or major capital market decline in the near future.

Coincidentally, the possibility of a major economic slowdown was actually postulated by one of the three panelists during the webinar. Eileen Marrinan, America’s director of research, Grosvenor, predicted “a recession by 2019.” Ironically, Marrinan made her claim just moments after Dean Schwanke, senior vice president for the ULI Center for Capital Markets and Real Estate, not only rejected the idea of a recession, but also said he felt the unemployment rate will drop slightly during the coming three years

Another panelist, Jim Clayton, head of investment strategy and analytics for Barings Real Estate Advisers, said he was “not in the recession camp.” Josh Scoville, senior managing director for Hines, split the difference, predicting “more of a slowdown” than a recession. He characterized the ULI forecast report as “too sanguine,” with “some imbalances to overcome.”

Marrinan fired back that the US “is already falling into a recession,” but she softened her tone by saying it would not be as bad nor as difficult to recover from as the 2007-2008 financial disaster. She did say she felt jobs will be lost and GDP will decline in the upcoming period of fiscal trouble.

Scoville agreed, saying the monetary slowdown that clobbered the nation last decade “should only happen every 100 years.”

The panel took another unexpected turn when moderator Gadi Kaufmann, managing director and chief executive office, RCLCO, asked each what he or she felt would be the major “disrupters” of the economic market.

Two panelists, Scoville and Clayton, worry about the impact of self-driving automobiles on the population. “Driverless cars will have an impact on walkability areas,” noted Scoville. He had mentioned the importance of walkable communities earlier in the discussion.

“Americans love their cars,” said Clayton. “This thing [self-driving cars] is really, really interesting.”

Moderator Kaufmann offered the possibility that parking garages might become self-storage units. And Marrinan said autonomous cars could even revive suburbia.

In his turn, Clayton also mentioned that millennials, often thought of as disruptors, are actually not. “A lot of this has been overplayed.”

The ULI survey also offered the following comments about market sectors:

Office — Rental rate growth is less optimistic than the last forecast. Office vacancy rates are expected to decline from 13.1% in 2015 to 12.8% in 2016 and then plateau in 2017 and 2018.

Apartments – Findings show expected rental growth to remain above the 20-year average growth rate of 2.8%. They are expected to moderate to 3.5% in 2016, 3.0% in 2017, and 2.9% in 2018.

Retail – While the recent Real Estate Consensus Forecast predicts minimal or no change for both retail availability and rental growth rates in 2016, respondents are more pessimistic for 2017 and 2018. Retail availability rates are forecast to decline from 10.8% in 2016 to 10.6% in 2017, then increasing to 10.7% in 2018. Retail rental rate growth is expected to grow at 2.0% in 2016 and 1.6 % in 2017; however, it is predicted to dip below the 20-year average to 1.3% in 2018.

Industrial/warehouse – Survey results show expected continual growth in warehouse rental rates, with increases of 4.7% in 2016, 4.0% in 2017 and 2.7% in 2018.

Hotel – Occupancy rates are predicted to remain above 65.0% levels for the next three years, reaching 65.5% in 2016 before inching down to 65.2% in 2017 and 65.0% in 2018.

The Urban Land Institute is a nonprofit education and research center supported by its members. Its mission is to provide leadership in the responsible use of land and in creating and sustaining thriving communities worldwide.

Oct. 21, 2016 Realty News Report Copyright 2016

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