ULI: Partly Sunny Economic CRE Forecast through 2024

June 01, 2022

The consensus among 47 economists from 36 real estate organizations about the U.S. economy and commercial real estate is mostly upbeat about the next three years, according to the latest ULI Real Estate Economic Forecast. The economists, who were surveyed between March 24 and April 13, forecast better than long-term averages in GDP growth, employment growth, the unemployment rate, transaction volume for CMBS issuance, CPPI growth, vacancy and availability rates for the industrial, apartment and retail sectors, and rental rate changes for the industrial, apartment, office and retail sectors through 2024.

On a panel call to discuss the forecast, industry experts said the lending environment changed quickly when the Ukraine war started, not only with higher rates but also different terms. Leveraged buyers may be forced to pull back from CRE investments, which presents an opportunity for all-cash equity buyers, the panel asserted. Plenty of capital is already earmarked for real estate investments, keeping cap rates intact, and there is plenty of cash to fill the gap of leveraged buyers so far, panel experts said.

Other highlights of the forecast include:

  • GDP growth is forecast by the economists at 3.2% in 2022, 2.3% in 2023 and 2.1% in 2024, all above the 20-year average of 1.95%.
  • Commercial real estate transaction volume is anticipated to moderate from the record high of $846 billion in 2021, but will exceed pre-pandemic highs at $800 billion in 2022, $735 billion in 2023 and $750 billion in 2024.
  • Commercial property price growth was up 19.5% in 2021, nearly triple the price growth in each of the five previous years. Price growth is anticipated to moderate to 10% in 2022, 6% in 2023 and 5.9%, all above the long-term average of 5.2%.
  • Total returns for institutional-quality direct real estate investments, as measured by the NCREIF Property Index, were 17.7% in 2021. Returns are forecast to moderate to 10% in 2022, 8% in 2023 and 7% in 2024, which is similar to returns in 2017 to 2019.
  • The forecast calls for returns in various property sectors to range from a high of 20% for industrial properties to 5.4% for retail properties in 2022, then range from 9.8% for industrial properties to a low of 5.3% for office properties in 2024.

Multifamily sector forecast

Housing affordability issues and the undersupply of all types of housing make demand a strong tailwind for the multifamily sector, the panel said. Opportunities for multifamily investors are geographically wider since demand is higher for suburban garden apartments and increasing again for urban locations. Experts say there’s evidence people are moving back into the city even if they’re not going back to the office.

Total returns for apartments, which were 19.9% in 2021, are anticipated to moderate to 14% in 2022, 9% in 2023 and 7.8% in 2024. The 20-year average is 8.9%.

The 20-year average for apartment vacancy rates is 5.2% and the forecast calls for vacancies to be well below that rate at 2.5% in 2022, 2.7% in 2023 and 2.9% in 2024.

Rental rate change is also anticipated to be positive and well above the 20-year average of 1.7% although lower than 2021’s 13.4% rate change. For 2022, the forecast calls for a 7.5% change in rents, followed by 5% in 2023 and 3.4% in 2024.

Inflation and cap rates

The unexpected decline in GDP for the first quarter of 2022 and high inflation are headwinds for CRE investors, but the consensus is that the Fed’s tightening and job growth are signs of a strong economy. However, the panelists differed on how quickly inflation can be brought under control and acknowledged the difficult road ahead for the Fed to engineer a soft landing.

The ULI economists forecast that inflation will moderate slightly from 2021’s CPI of 7% to 6% in 2022, 3% in 2023 and 2.5% in 2024. The 20-year average CPI rate is 2.3%.

While the 20-year average 10-year Treasury rate is 2.9%, between 2011 and 2021, the average was 2.1% per year. The rate is anticipated to rise to 2.7% in 2022 and 3% in 2023 and remain at 3% in 2024.

The ULI forecast calls for cap rates to stay at 4% in 2022, rise to 4.3% in 2023 and remain at 4.3% in 2024.