The commercial real estate industry has experienced an amazing run over the last few years.
That’s not expected to drastically change any time soon, but its rate of success might be more tempered in the near term.
The Urban Land Institute recently released its 2018 ULI Real Estate Economic Forecast, which surveyed economists and industry professionals about commercial real estate’s future through 2020, and for the most part, they said that many key performance metrics will start to cool off.
The economists and analysts said that the macroeconomic performance we have seen of late, with strong GDP growth and extremely low unemployment, could be more tempered over the next two years. Specifically, they see GDP increasing by three percent this year and dropping to 1.7 percent in 2020, while unemployment is expected to end 3.8 percent by the end of 2018 and rise to four percent in two years.
These, and other overall metrics, mirror what the commercial real estate observers say will happen in the industry.
For example, capitalization rates, which came in at 5.1 percent in 2017 are expected to end this year at five percent but are forecast to increase to 5.3 percent by the end of 2020. Total commercial real estate transactions are also poised to dip, from $490 billion last year to $413 billion in 2020. However, this volume is still much higher than the 17-year annual average of $313 billion. Meanwhile, CMBS issuances are expected to come in at $90 billion by year and drop to $80 billion in two years.
The report also broke down expected returns, rental rates and occupancy by sector through 2020, and respondents said that numbers will soften slightly across the board. Industrial will see the biggest discrepancy in returns over the next two years, falling from a predicted 11.4 percent this year to 7.2 percent by the end of two years. Industrial and hotels are set to see the biggest drop in rental-rate increases, with a 1.5-percent decrease for both assets types. The biggest vacancy increase is seen for offices, rising from 13 percent by year’s end to 13.6 percent by the close of 2020.
None of these expected numbers are earth shattering in their ramifications for commercial real estate, and some slight changes in the direction of the economy could mean better, or worse-than-predicted, results. But if these small dips in fundamentals are the most investors in the industry have to worry about in the near-term future, then the future is still bright, even if not as much as it once was.
About GRS Group:
GRS Group is a leading provider of commercial real estate (“CRE”) services worldwide. With offices across the United States, Europe, and affiliates around the globe, GRS Group provides local market knowledge with a global perspective for institutional real estate investors, occupiers and lenders worldwide. The GRS Group team has evaluated and advised on over $1 trillion in CRE transactions.