At Urban Land Institute’s webinar “Is 2019 the Pivot Point for the Economy and Real Estate?” which took place earlier this week, four industry experts discussed the organization’s three-year forecast (2019 – 2021) for the U.S. economy and commercial real estate sector. Panelists included: moderator Jeanette Rice, Americas head of multifamily research at real estate services firm CBRE; Adam Ruggiero, head of real estate research at MetLife; Bill Maher, head of research and strategy at LaSalle Investment Management; and Stuart Hoffman, senior vice president and senior economic advisor at PNC.
The report, which was based on the median consensus of 45 economists/analysts at 33 major real estate investment, advisory and research firms, provides forecasts for major economic indicators, real estate capital markets, investment returns, vacancy rates and property prices.
Here are some takeaways from the webinar:
1. The U.S. economy will continue to expand, but growth will plateau, with GDP growth falling from 2.3 percent (above the long-term average) in 2019 to 1.8 percent (below the long-term average) in 2020 and 2021.
Ruggiero stressed that GDP growth in 2018 was boosted by tax cuts, a massive increase in federal spending, and U.S. companies repatriating overseas profits due to the lower corporate tax. “I would be surprised if 2019 growth isn’t lower than predicted, as we’re running the largest deficit ever, and tax incentives driving growth last year will not stick around.”
2. Job growth is expected to moderate in 2019, dropping from 2.9 million in 2018 to 2.3 million in this year, 1.42 million in 2020 and 1.2 million in 2021.
“There are more job openings than people to fill them, because of a tremendous mismatch in skills needed that isn’t being met by our educational system,” Maher said, noting that declining immigration will also widen the gap in jobs vs. talent.
Labor mobility is another issue for the labor market. Noting that about half of the 3 million jobs created last year were in retail, Ruggiero pointed out that a person accustomed to earning $60,000 annually working in a coalmine, for example, probably will not move for a $25,000 to $30,000 retail job.
3. The Consumer Inflation Index (CPI) is expected to move up to slightly to 2 percent in 2019 and plateau in the following two years. A combination of global economic weakness, trade tensions and shaky consumer confidence is hurting business and real estate investment, according to Ruggiero. The tight job market and wage growth are adding inflationary pressure, he noted.
4. The 10‐year treasury rate is expected to increase to 2.8 percent from 2.7 percent. Average cap rates for institutional-quality investments ((NCREIF cap rates) are expected to remain unchanged at 4.8 percent in 2019, then move up to 5.2 percent by 2021.
5. Sales transaction volume is expected to moderate over the next three years, decreasing from $562 billion in 2018 to $535 billion this year and to $480 billion by 2021.
6. The RCA Commercial Property Price Index (CPPI) will continue to grow, but investors can expect lower returns, which are forecast to decrease from 5.0 percent in 2019 to 2.8 percent by 2021.
7. Additionally, institutional‐quality, direct real estate investments, are expected to decelerate, with returns forecast to drop from 6.7 percent to 6.0 percent in 2019, then level off at 5.0 percent.
8. Industrial space availability declined for the ninth straight year in 2018, to 7.0 percent, and will reach a new post-recession low of 6.9 percent in 2019, before ticking up to 7.1 percent by 2021. Healthy rent growth in this sector is expected to continue, but at a more moderate 3.8 percent in 2019 and 2.4 percent in 2021.
Ruggiero said demand for industrial space continues to outpace supply, despite the large amount of new product coming to market. One reason, he noted, is the push for quick e-commerce delivery is accelerating demand for space, because users are investing two to three times as much in merchandise stock to accommodate speed. Reverse logistics—e-commerce returns—are also boosting industrial demand, added Rice.
9. Average vacancy in the office sector moderated in 2018 at 12.6 percent. Fluctuation in office vacancy is expected to continue in the coming years, with 2019 vacancy expected to edge down to 12.5 percent, then increase by 2021 to 13.0 percent. Even with vacancy increasing, rent growth in the sector should continue. Office asking rents increased by 2.5 percent in 2018, but are forecast to trend downward this year and dip by 1.3 percent by 2021.