ULI’s April Real Estate Report provided some key trends for today and the year to come that are mostly positive but don’t necessarily meet the high-flying numbers of last year. Still, they are forecast to exceed pre-pandemic highs.
Commercial real estate transaction volume is coming off a historic high of $846 billion in 2021, almost double the pandemic-year low of $431 billion in 2020.
This year they are expected to reach $800 billion, $725 billion in 2023 and $750 billion in 2024.
Eli Randel, CREXi Chief Strategy Officer, tells GlobeSt.com that pent up capital continues to be attracted to commercial real estate given its yield relative to cash and bonds, lower volatility profile, inflation hedge, leverage-ability, and general resilience.
“As capital continues its flight to quality, real estate is a beneficiary and while valuations may soften due to increased interest rates and rising costs of capital, the softening will hopefully be offset by rental rate growth amid a general under-supply in part a result of soaring construction costs,” Randel said. “Deep pocketed investors like Blackstone remain bullish on commercial real estate amid changing economic conditions.”
David Vincent, investment specialist at Cadre, tells GlobeSt.com that “there is no doubt there’s still a lot of demand for real estate, though we are starting to see a shift in the number of bidders on some deals. That doesn’t mean that deals aren’t getting done, but the market is digesting the macro environment and so some liquidity is sitting on the sideline.”
Vincent said he believes the supply and demand dynamics for multifamily in certain markets are very compelling.
“Where supply remains constrained, it is still more expensive to build new projects to meet the current demand,” he said. “We are being selective in how we target assets in this sector with a focus on some newer vintage assets that we think may have more upside potential on a risk-adjusted basis.”
Price Growth Triple Each of Past Five Years
Price growth nearly tripled each of the past five years in 2021, increasing by 19.5% a year ago—even when growth in those years was already above their long-term average, ULI reported.
Price growth this year is expected to moderate to a solid 10%, before moderating further to 6% in 2023 and 5.9% the year after.
Vincent said that in Cadre’s recent price trend indices report, which covered the most recent changes to real estate transactions, it found that price growth remained positive, though there are signals that it might slow the next two years.
“While it’s easy to look at that slow down as bearish, it’s also important to consider the context of the extraordinary market that we just experienced over the past two years through COVID and consider that the recent pace of price growth was not expected to continue forever,” Vincent said.
Its forecasts mirror the growth that the market saw during the 2000s era.
“It’s also really important to discern between specific markets and the broader national trends,” Vincent said. “There is a fairly wide dispersion between our expectations for the fastest growing markets and the national average.
“So, even if the national averages are moderating, we still believe that there are certainly some attractive markets with room to grow. This is where our data science can give us an edge in identifying specific markets with potential to outpace the rest of the country, especially when we are able to drill down to the sector level—such as multi, industrial, office, etc.—within those markets and sub-markets.”
Vacancy and Availability Rate Changes Minimal
Change in vacancy and availability rates is expected to be minimal in the forecast period across property types, ULI.
“Industrial availability will remain low and essentially plateau, apartment vacancies will remain tight and only inch up, and retail vacancies will remain steady at slightly below their long-term average,” according to the report.
Office vacancy rates are expected to stay elevated and plateau at above their long-term average.
Vincent said that overall, the fundamentals in multifamily and industrial remain quite strong nationally and especially in select markets.
“We don’t expect that to change in the near term as both people and jobs are migrating to smaller secondary markets that are the biggest beneficiaries of this growth,” he said.
Industrial, Apartment Rent Growth Expected Strong
Also expected to be strong are industrial and apartment rent growth, with annual growth averaging 5.5% and 5.3%, respectively.
“Both sectors will experience the strongest growth in 2022 and then moderating growth in the subsequent two years,” according to ULI.
Continuing the consistent annual growth of the last decade, housing starts are expected to increase in the first two forecast years to 1.2 million this year and 1.25 million in 2023. Housing starts will decline slightly in 2024 to 1.1 million but remain at an appreciative level above the 20-year average.
Total Returns to Moderate
ULI found that total returns for institutional-quality direct real estate investments, as measured by the NCREIF Property Index (NPI), were a solid 17.7% in 2021.
Furthermore, it said that total returns are expected to moderate over the forecast period, to 10% this year, 8% in 2023, and the year after “return to levels similar to, or just exceeding, returns in the three pre-pandemic years with 7% total returns.”
By property type, 2022 returns are forecast to range from industrial’s 20% to retail’s 5.4%. In ‘24, returns are forecast to range from industrial’s 9.8% to office’s 5.3%.
Still, Marc Benjamin, partner in Eversheds Sutherland’s Real Estate Practice Group, tells GlobeSt.com that regarding transaction volume, price growth and total return, “one should consider the potential impacts of a rising interest rate environment and therefore some likely downward pressure and moderation on all three as a result of the same.”