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The latest survey of U.S. real estate economists shows continued declines in expected economic and real estate growth rates. Compared with six months ago, real estate economists have reduced their expectations about economic growth, interest rates, commercial mortgage–backed securities (CMBS) issuance, housing starts, and private real estate returns. One area of greater optimism is the industrial sector, with forecasts of lower availability and higher rents and returns. As was the case six and 12 months ago, there is no recession or major capital market decline in the near future. These results are based on the semiannual ULI Real Estate Consensus Forecast, prepared by the ULI Center for Capital Markets and Real Estate. The survey was completed by 51 real estate economists from 37 organizations from September 9 through October 3, 2016.

Some of the highlights from the survey, which covers year-end forecasts for 2016–2018, include the following:

• Commercial real estate prices as measured by the Moody’s/RCA Index are projected to rise by 3.8 percent per year over the next three years (5 percent, 4 percent, and 2.5 percent, respectively), compared with a long-term average increase of 5.7 percent. This is a marked drop from 2015 (10.9 percent rise.) After essentially no growth in prices through April, commercial prices have rebounded. Through July 2016, the Commercial Property Price Index is up 7.7 percent over July 2015.
• The industrial sector should have the greatest rent growth over the next three years, averaging 3.8 percent. Industrial was also the only property type with a more optimistic forecast than six months ago. The growth of e-commerce is leading to very strong demand for industrial and warehouse space. Average rent growth rates (2016–2018) for the other major property types are 3.5 percent for apartments, 2.6 percent for office, and 1.6 percent for retail. These forecasts are flat or down from six months ago.
• Over the next three years, vacancy rates are forecast to decline for all property types except apartments. Industrial availability will fall by 0.4 percent to 8.7 percent despite a healthy supply pipeline, a more optimistic outlook than six months ago. On the other hand, apartment vacancy will increase to 5.3 percent in 2018.

In summary, respondents to the October 2016 ULI Consensus agreed the economic growth continues at less-than-stellar levels. The length of the current expansion may weigh on forecasters’ minds, as well as uncertainty about the upcoming presidential election and economic and political turmoil abroad. U.S. real estate markets are intricately tied to the broader economy and capital markets, both of which are growing more slowly than earlier in the cycle. It is no surprise that the real estate market is following suit.

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