ULI’s economic forecast improves


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The Urban Land Institute (ULI) recently released its half-yearly economic forecast. It has a more positive outlook for the economy and for the multi-family housing industry than their last forecast 6 months ago.

The report combined individual forecasts from 42 economists and analysts into a consensus economic forecast for the US economy and real estate markets over the next three years. This summary focuses primarily on the sections of the report dealing with multi-family dwellings.

Look at the economy

The ULI report points out that the real GDP of the US economy contracted 3.5% in 2020, as employment fell by 9.4 million jobs. For 2021, the report forecasts real GDP growth of 6.5% but employment growth of only 5.5 million jobs. That would leave the economy 2.8% larger than in 2019, but with 3.9 million fewer workers, or around 2.6% of the number of people employed at the end of 2019.

The report forecasts real GDP growth of 3.9% in 2022 and 2.5% in 2023. Employment is expected to increase by 3.0 million in 2022 and 2.1 million in 2023, when it will exceed and finally the total employment level in 2019.

Inflation as measured by the Consumer Price Index (CPI) in 2020 was 1.4%, lower than the recent average of 2%. In 2020, the ten-year Treasury rate fell below 1%, well below the 20-year average of 3.07% and the recent 5-year average of 2.3%.

For 2021, the CPI is expected to rise 2.8%, up sharply from the 2.0% forecast in the ULI economic forecast of 6 months ago. Inflation is expected to decline to 2.5% in 2022 and to 2.3% in 2023.

The 10-year Treasury rate is now expected to be 1.95% in 2021, compared to 1.0% forecast 6 months ago. It is expected to rise to 2.25% in 2022 and 2.5% in 2023.

The history and forecasts of the CPI and the ten-year Treasury rate are presented in the first graph below.

uli economic forecast
Data source: ULI
Focus on the apartments

Apartment vacancy rates, which reached 7.2 per cent in 2009, fell to 4.1 per cent in 2009. Vacancy rates hit 4.5 per cent in 2020 and ULI expects them to increase slightly to 4.55% in 2021. This is down from a vacancy. 5.1% rate forecast for 2021 in the latest economic forecast 6 months ago. Vacancy rates are now expected to be 4.38% in 2022 and 4.18% in 2023.

ULI reported that apartment rents fell 4.2% in 2020. ULI now expects apartment rents to rise 1.7% in 2021 and 3.0% in 2022. These rates are up from rent growth projections of 0.1% for 2021 and 2.5% for 2022 in the economic forecasts of 6 months ago.

The historical and forecasted vacancy rates and rental growth rates are presented in the following chart below.

uli economic forecast
Data source: ULI

While the ULI forecast predicted strong construction of single-family dwellings over the next three years with housing starts reaching 1,200,000 units by 2023, the report did not contain a forecast for construction of multi-family dwellings.

The apartment business

The report included a projection of total annual apartment returns as defined by the National Council of Real Estate Investment Trustees (NCREIF). These returns have a 20-year average of 8.7%, but had declined to 5.5% in 2019 before falling to just 1.8% in 2020. ULI predicts that total annual returns will rise to 5.6 % in 2021, 6.7% in 2022, before dropping slightly. at 6.5% in 2023.

The ULI forecast also contains projections for commercial real estate cap rates, transaction volumes and real estate price changes. However, these projections are for all commercial real estate and apartments are not broken down as a separate asset class. In short, the forecast is for cap rates and house price increases to remain close to where they were in 2019, 4.5% and 5% respectively. Transaction volumes are expected to recover steadily from the decline in 2020, but they will not quite be back to their 2019 peak by 2023.

The comprehensive economic forecast also covers other types of commercial properties and the single-family housing market. It is available to ULI members at uli.org. The next ULI consensus forecast is expected to be released in October.

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