Fundamentals in the commercial real estate industry are expected to improve significantly over the next three years, according to a recent survey of economists and analysts from real estate organizations.
The Urban Land Institute (ULI) noted that equity REITs are projected to post double-digit returns in 2013 and 2014 in its recently released ULI/Ernst & Young Real Estate Consensus Forecast for April 2013.
Calvin Schnure, NAREIT’s vice president of research and industry information and contributor to the semi-annual survey, explained that underlying this favorable performance is an expectation that GDP growth will re-accelerate to 3% or more in 2014 and 2015. This rebound comes after slowing slightly in 2013, due to the federal sequester and fiscal cliff deal. The unemployment rate is projected to move down steadily over the next few years, to 6.5% in 2015.
“The overall economy continues to improve, despite bumps in the road like the recent government sequester,” said Schnure. “The recovery in commercial property markets is still in the early stages, with lots more upside than downside risks.”
When it comes to individual sector returns, the survey noted that multifamily will likely continue to lead the way, but with other sectors not far behind.
Schnure said that conditions are expected to stay tight in multifamily housing, with vacancy rates remaining at or near their current low levels. He added, however, that rent growth is expected to decelerate, especially as the single-family housing market rebounds. Single-family housing starts are projected to rise from 535,300 in 2012 to 700,000 this year, and reach 1 million by 2015.
Vacancy rates are projected to trend down in office and retail as these sectors benefit from sustained economic growth, according to the survey. Rent increases are likely to be modest, though, as vacancy rates remain elevated. (REIT.com) Continued Improvement for CRE
vacancy rates
Commercial: Strengthening Fundamentals
Multifamily housing is becoming a landlord’s market, commanding bigger rent increases, NAR’s quarterly Commercial Real Estate Market Survey shows. More broadly, all of the major commercial sectors are seeing improvement in fundamentals. NAR forecasts commercial vacancy rates over the next year to decline 0.4 percentage points in the office sector, 0.8 points in industrial real estate, 0.9 points in the retail sector, and 0.2 percentage points in the multifamily rental market.
Weak Economy Holding Back Commercial Gains
Commercial real estate vacancy rates are flat and projections for growth have been moderated because economic growth and job creation have been weaker than expected, according to NAR. Look for modest improvements over the coming year.
Commercial Stabilizing, But Rents to Stay Soft
A stabilization trend is taking place in commercial real estate sectors, but in most markets rent will remain soft except for multifamily rentals. “Very limited construction of new commercial real estate over the past few years has essentially fixed the supply of available space,” says Lawrence Yun, NAR chief economist. “This means vacancy rates could fall quickly from any increase in demand for commercial space.”
