The Urban Land Institute's latest Real Estate Economic Forecast shows that while real estate economists are tempering their views on economic growth in the U.S., they continue to forecast positive gross domestic product (GDP) growth, slower but solid job growth and steady real estate markets and returns through 2021.
The conclusions in the ULI report are based on an August 2019 assessment that surveyed 41 economists and analysts at 32 leading real estate organizations.
Despite these headwinds, the U.S. set a new longevity record for economic expansion in July 2019, exceeding 10 years for the first time since records have been kept.
“The main takeaway from the forecast is that contributing economists see no end to the current record-setting economic and real estate expansion that started in 2010," says ULI leading member William Maher, director of Americas Strategy and Research at LaSalle Investment Management. "Economic growth, including GDP and job growth, is forecast to moderate from the strong levels of 2018, which should keep long-term interest rates low. With the likely exception of retail, which continues to be weighed down by restructuring, real estate fundamentals and returns should stay steady through 2021."
The semi-annual survey, which covers the forecast period of 2019-2021, made these predictions:
U.S. GDP will grow by 2.3% in 2019, down from 2.9% in 2018, but unchanged from the previous forecast, released on May 1. GDP growth is projected to moderate to 1.7% in 2020 and then rise slightly to 1.9% in 2021.
Net job growth should average 1.7 million per year through 2021, compared to a long-term average of 1.1 million. The expected job growth of 2.2 million in 2019, 1.4 million in 2020 and 1.5 million in 2021 is up from the prior forecast. However, many economists are predicting slower job growth as the number of skilled or qualified workers dwindles. The national unemployment rate is forecast to remain at its current level of 3.7% in 2019, the lowest rate of the past 50 years but edge up to 4.1% by 2021.
Expected yields on the 10-Year U.S. Treasury note declined from predictions of six months ago (and even more dramatically compared to one year ago) for all forecast years. The year-end yields are forecasted to be 1.8%, 2.0% and 2.3% in 2019, 2020 and 2021, respectively. This is compared to year-end projections of 2.8% for 2019 and 2.9% for 2020 and 2021 made this past April; and projections of 3.3% for 2019 and 3.5% for 2020 made in October 2018. The decline in the expected yields for the 10-Year U.S. Treasury note “is a remarkable shift and should be positive for real estate values,” Maher says.
Real estate transaction volumes will moderate over the forecast period after a strong 2018. The final 2018 volume of $579 billion was the second highest level since the global financial crisis and cannot be sustained, according to the forecast. Economists predict transaction volumes of $475 billion in 2019, $450 billion in 2020 and $415 billion in 2021, all down from prior forecasts. Expectations for annual CMBS issuance fell slightly, to $75 billion in 2019, $65 billion in 2020 and $75 billion in 2021, just below the long-term average of $80 billion.
Commercial real estate price growth as measured by the Moody’s/RCA Commercial Property Price Index (CPPI) is projected to moderate over the next three years to 5.1%, 4.0% and 3.9% in 2019, 2020 and 2021, respectively. CPPI forecasts are up for all years compared to forecasts of six months ago, possibly due to lower interest rates.
Real estate economists have upgraded equity real estate investment trust (REIT) returns, following a very strong start to 2019. The National Association of Real Estate Investment Trusts (NAREIT) total return composite is forecast to average 9.8% from 2019-21, up from a forecasted average of 5.7% six months ago. U.S. REITs are up by 28% year-to-date as of September 2019, so the full year forecast of 15% for 2019 may be conservative.
The single-family housing construction outlook weakened over the past six months, as higher construction costs may be slowing demand. Unit starts are forecast to fall from 877,000 in 2018 to 850,000 in 2019, 810,000 in 2020 and 800,000 in 2021. Expected construction in all years is below the long-term annual average of 975,000 homes and would mark the first decline in deliveries since the global financial crisis. Home price growth is forecast to average 3.2% over the next three years.