Three years is a long time in real estate investing, especially in such turbulent economic times, but the Urban Land Institute, undaunted, recently issued a report that says to expect positive growth across the board by 2023.
The ULI Center for Real Estate Economics and Capital Markets based its projections on the median of forecasts across 27 key measures from 42 economists and analysts at 39 leading real estate organizations.
The 50-page May 2021 report is downloadable here. Detailed looks at different segments of the real estate industry are included -- including real estate capital markets, investment returns for four property types, vacancy rates and rents for five property types, and housing starts and prices.
Broad economic indicators are provided, too, giving additional context to this trove of data that can provide actionable insight to real estate investors considering what to do now and where to go next.
Rent growth by sector evens out in the next two years
For instance, of direct interest to investors in such income-dependent ventures as real estate investment trusts (REITs), the economists and analysts expect that rent growth this year will be led by industrial properties at 4%, followed by apartments at 1.7%, retail at -2%, and office space at -2.9%.
Retail and office rental growth are expected to remain flat in 2022, meanwhile, but the industrial and multifamily sectors continue rental growth at 3.7% and 3% respectively, while growth for retail and office is essentially flat. By ‘23, positive rental growth is forecast for all sectors, ranging from 3.1% for both the industrial and apartment sectors to 1.5% and 2% in the retail and office sectors, respectively.
CRE transaction volume rallies from pandemic plunge
To rent out something, you have to own something, of course, and the report says that commercial real estate transaction volume should rise steadily nationwide from a seven-year low of $427 billion in 2020 -- after a pandemic swoon from $598 billion in 2019 -- to $550 billion in 2022 and $590 billion in 2023.
Price growth in 2020 was 5.2%, the report adds, not bad considering the circumstances although nothing like the single-family housing market, and is expected to dip to 4.2% this year and then hold at 5% in 2022 and 2023.
As for vacancy and availability rates, the office sector is showing the most decay for 2021, up 145 basis points, the ULI report said. It's also showing the fastest growth, with a forecast to improve by 70 basis points in 2023. All the other sectors are expected to show marginal improvement of 20 basis points or less in the next two years.
Total returns led by the industrial sector
Meanwhile, total returns for institutional-quality real estate investments were positive in 2020 but, at 1.6%, the lowest in 11 years, the report said, adding: “Total returns are forecast to increase over the forecast period, returning by ‘23 to the moderate rates of the years immediately before the pandemic. The forecast is for returns of 4.5%, 5.9% and 6.5%, in ‘21, ‘22 and ‘23 respectively.”
Again, industrial property leads the way here, with 2021 returns of 12% expected to dip to a still-respectable 8.2% in 2023. Pulling up the rear among institutional-quality CRE investments this year is retail, expected to turn in a return of -1% but growing to 5.2% by 2023.
Forecasts vs. long-term averages
The report also includes lists of how a range of property and investment types and economic indicators are expected to perform the rest of this year and in 2023 in terms of forecasts versus long-term averages.
For instance, home price growth and single-family starts this year? Higher than long-term averages. Hotel occupancy, worse than long-term averages. CMBS issuance this year? Worse. NCREIF industrial returns, meanwhile, are seen as above-average this year, while office, multifamily, and retail are worse than their long-term averages.
And, heads up here, equity REIT total returns are expected to overall be above the long-term average this year and worse than that in 2023. Same with home price growth.
The Millionacres bottom line
Clearly these professional prognosticators expect industrial and multifamily to be the lead property types in the next couple years, with the office sectors, and even hard-hit retail, emerging in the plus column. Then, some of these property and investment types change places in the expectations column.
These projections are the result of taking expectations from a few dozen people in positions where their own companies and their clients stake claims based, at least in part, on their broad assessments. Of course, every real estate investment decision is personal and local, but these broad strokes might provide some inspiration for your own portfolio’s palette.