Real estate has, and always will be, a local game. However, due to globalization, the macroeconomic environment is more influential now than ever. Listed below are several crucial market indicators and metrics that drive the US commercial real estate outlook.
GDP
Gross Domestic Product is expect to grow at 2.2 percent each year through 2018. Keep in mind this forecast is down 60 basis points from the forecast of six months ago.
Job Growth
Net job growth should average 2.0 million per year through 2018. This forecast is down from 2.7 from the forecast of six months ago.
10 Year Treasury
The yield on the ten year treasury note will rise gradually over the next three years. It is expected to reach 3.2 percent in 2018, up from a current rate of 1.8 as of today.
Commercial Real Estate Prices
Commercial real estate prices as measured by Moody’s/RCA Index are projected to rise by 3.6% per year over the next three years. The expected growth rate has been on the decline from 2015 in which prices were expected to rise at 12.7%.
Transaction Volume
Transaction volumes peaked for this cycle in 2015 at $534 billion. Economists believe transaction volume will gradually decline over the next three years. One of the reasons real estate volumes peaked in 2015 is due to CMBS expectations. Economists expect a decline to $85 billion in 2016, down from $101 billion in 2015. New regulations set to take effect later this year will impede new issuance to an even greater degree.
Total Returns
The NCREIF Property Index (core unleveraged properties) total returns should average about 7.5%. The 2015 forecast was 8.1%.
In a nutshell, economists are predicting a slowdown in US economic growth. The economy is still going to grow, just not as quickly as previously predicted. We have been in an expansion for much longer than the average economic expansion since WWII; however, cycles are gradually lengthening, and due to the gravity of the last recession, there is more room for growth than typical recessions. I suspect we are approaching the peak of this cycle in most asset classes in the gateway cities and primary markets. It’s time to start investing in secondary and even tertiary markets, and selling off core assets in gateway markets.
*Data comes from the ULI Real Estate Consensus Forecast.
