Outlook for CRE Investment Brightens

Outlook for CRE Investment Brightens

The United States commercial real estate market is finally enjoying a revival. Compared to six months ago, expectations for the market are up.

The Urban Land Institute conducted a survey that estimated real estate transaction volume for the year would top $310 billion. In 2012, the transaction volume was at $290 billion. The change between the two years represents a seven percent increase. In 2014, the number is forecasted to advance to $340 billion. By 2015, it is predicted to jump to $360 billion.

Survey results

All of this data was completed at the ULI/E&Y Real Estate Consensus forecast. This survey occurs twice a year. It represents the third survey in a row where this kind of data was collected. In it, 38 of the nation’s top economists and analysts voiced their predictions for the real estate market in the coming years.

The survey showed that commercial mortgage-backed securities were forecasted to rise by 50 percent. This would represent a jump from $48 billion in 2012 to $70 billion in 2013. By 2014, commercial mortgage-backed securities are supposed to rise to $80 billion. They are expected to gain an additional 25 percent to reach $100 billion by 2015. The expected gain is significant for the real estate market. In 2007, these securities reach a record level of $230 billion. Since that time, the weakened real estate market has failed to come close to the record.

What the survey suggests is that the commercial real estate industry will be able to stabilize over the next three years. There may be limited growth in prices and returns, but the market will be able to enjoy a period of positive growth. After several years of low consumer confidence numbers, the real estate market is finally making a comeback as investors gain confidence.

NAREIT forecasts a drop

According to NAREIT, returns will decrease during 2013. In 2009 and 2010, returns were at an impressive level of 28 percent. The decline in returns will not harm the real estate market since it represents a more sustainable growth pace. In 2013, REIT returns are supposed to reach 12 percent. By 2014, they are forecasted to fall 10 percent before they drop an additional 8 percent in 2015.

On the ULI/E&Y survey, economists forecasted total returns for institutional-quality direct real estate investments. This sector includes investments in offices, apartments, retail and industrial. For 2013, total returns are expected to be at 9.5 percent. Forecasts for 2014 and 2015 are 9 percent and 8 percent respectively. This marks a downward trend that began in 2012, but is relatively normal compared to historical averages.

Outlook appears positive

All of these forecasts combined equal out to a generally positive forecast for the economy. Employment rates and gross domestic product are forecasted to grow in the coming years. The most recent prediction has GDP advancing by 2 percent in 2013 and 3 percent in 2014. By 2015, the GDP is supposed to have a 2.1 percent annual growth rate. The unemployment rate is supposed to fall to 7.5 percent by the end of this year. In 2014, it is expected to fall to 7 percent and should reach 6.5 percent by the close of 2015. Total jobs are supposed to increase by 2.1 million in 2013 and 2.4 million in 2014. In 2015, jobs are supposed to increase by a total of 2.6 million.

Housing prices rise

Last month, the price for commercial property in the United States breached the level it was at in 2007. Through favorable interest rates and financing options, commercial real estate values were able to rise. The firm Green Street Advisors reported that its all-property index advanced by one percent. It is currently one percent high than the record set in August of 2007. An analyst at the firm forecasted that the gains would continue. The real estate market continues to offer better returns than the bond market and investors can finance their purchases with ease.

According to Green Street, these changes are driven by lowered borrowing costs. As the economy exits the recession, there has been an increase in lending. This in turn has increased the demand for commercial real estate. On Moody’s/Real Capital Analytics Commercial Property index, real estate values were just 20 percent below their February peak.

With rising values and bright expectations, right now is an excellent time to invest in the commercial real estate market. According to market analysts and several indexes, the market is experiencing a period of growth that will continue through 2015. Returns will fall in the upcoming two years, but real estate investments still offer a higher return rate than the bond market and are more stable than stocks.