ULI’s fall 2021 real estate economic forecast reveals near-term optimism for real estate

From left to right: Lee Menifee, Managing Director, PGIM Real Estate; Tom Errath, Managing Director, Harrison Street; and Ben Breslau, Managing Director of JLL Americas Research, speaking at the ULI 2021 Fall Meeting. In the video to the right is Dr. Kenneth Rose, President of the Fisher Center for Real Estate and Urban Economics at the University of California at Berkeley.

Despite a forecast for higher inflation and rising interest rates, experts continue to have a favorable opinion on the returns and performance of commercial real estate. However, the high tide of improving the economy does not raise all ships to the same level. There remains a clear bifurcation between and within the real estate sectors.

ULI’s fall 2021 real estate economic forecasts for 2021 to 2023 reveal a mixed bag on key economic indicators. On the positive side, economists and analysts polled predict strong gross domestic product (GDP) and job growth. On the other hand, higher inflation and moderate increases in interest rates are expected. Inflation and interest rates provide important backdrop for the performance of commercial real estate, rental growth, capitalization rates and transaction volume.

Members-only webinar: ULI real estate economic forecast, fall 2021

One of the big questions for the industry is where are the cap rates and prices going, and the bifurcation of the market is very evident in both cases. “Part of the transitory value of real estate comes from the very low cost of debt. Leverage matters. So if interest rates go up 100 or 150 basis points over 10 years, it’s hard to see cap rates not going up, ”said panelist Kenneth Rosen, president of Rosen Consulting Group and president of Fisher Center for Real Estate and Urban Economy.

Others believe that capital inflows and investor demand could provide a counterweight that could keep the pressure on cap rates. “The tailwind in terms of property favorability despite all the challenges of the macro environment will accelerate, not slow down. So we actually think cap rates will stay fairly tight or even decline in some areas, ”said panelist Ben Breslau, managing director, Americas Research, at JLL.

The National Council of Real Estate Investment Trustees (NCREIF) cap rate forecast is relatively stable, going from an average of 4.4% in 2021 to 4.3% for 2022 and 2023. However, some industrial assets are falling. sell at 3.5% cap rates. while retail properties are above 7 percent in some cases.

Forecasts for house price increases based on RCA’s Commercial Property Price Index predict a 10% jump this year, followed by 7% in 2022 and 6% in 2023. “With l “Benefit from some real-time data that a lot of us get, that 10 percent number seems very conservative,” said panelist Lee Menifee, managing director of PGIM Real Estate and head of investment research in the Americas. Although when you look at the roster this average is very misleading, he added.

Industrial and apartment buildings continue to outperform the market in terms of rental growth. ULI forecasts that each will show annual rental growth of 5% this year. On the other hand, the growth in rents for retail businesses should be 0.6% and that for offices by -1.5%.

Additionally, alternative assets have seen strong rental growth over the past two years, which is clearly helping to boost performance, noted panelist Thomas Errath, Managing Director of Harrison Street Real Estate. “However, there is a bit of a supply and demand factor that continues to drive cap rates down,” he said. Investors are looking to buy trophy assets in many categories such as life sciences, student housing and self-storage, Errath added.

Investor demand is driving a rebound in trading volume. ULI forecasts expect trading volume to reach $ 600 billion in 2022 and 2023, which is close to the all-time highs of 2019. Some see core assets as “bond-like” alternatives , while others are willing to take more opportunistic risks. “It’s a time when there is a lot to buy, but you have to be more courageous to eventually buy things against the grain,” Rosen said.

The highlights of the biannual survey of economists and analysts are as follows:

  • GDP growth will remain strong at 5.7% for 2021 and slow to 2.5% in 2023.
  • Inflation is expected to rise to 4.3% this fall, then decline to 3% in 2022 and 2.4% in 2023, which is comparable to 2019 levels.
  • The 10-year interest rate is expected to rise slightly by 65 basis points to reach 2.25% in 2023.
  • Transaction volumes continue to increase with $ 515 billion forecast for 2021, then will rise to $ 600 billion in 2022 and 2023.
  • Expectations for total NCREIF returns are high, reaching 8% in 2021 and remaining at 7% in 2022 and 2023.

Related: ULI Forecasts For Further Improvement In US Economic Outlook | Real estate economic forecasts

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