The recovery in the US commercial property market appears set to continue over the next two years. According to the results of a new survey, from the Urban Land Institute and Ernst & Young, transactions during 2016 are expected to reach $430bn (£256bn) — well ahead of a pre-recession 2006 record.
Thirty-nine analysts and leading industry economists were asked how they saw the US property industry developing. Their collective thinking predicts a continued improvement in both commercial real estate and the residential sector. And, as if to underscore the accuracy of the joint forecast, they unanimously agreed on 27 economic and property indicators.
There are also definite signs of increased optimism from last October’s Consensus Forecast. “Respondents to the survey project consistent growth in the real estate industry, bringing some key factors back to pre-recession levels and others moderating to long-term averages,” explained Anita Kramer, vice-president at ULI Center for Capital Markets and Real Estate. “This overall outlook for real estate is supported by expected ongoing improvements in the economy.”
The issuance of commercial mortgage-backed securities, a key source of financing for commercial real estate, is expected to continue its rebound with consistent growth all the way to 2016. Hotel occupancy rates are also expected to continue improving, with a corresponding fall in vacancy rates for office and retail space and industrial properties. The survey expects retail rents to rise this year for the first time since 2007.
Howard Roth is global real estate leader for Ernst & Young. “Although we’ve made significant improvement over the past year, the recovery has been uneven globally and many risks still exist,” he explained. “Among these are high global unemployment, high government debt, deflationary pressure in advanced economies and weak domestic demand … Still, all signs point to a continued gradual improvement in both the economy and real estate market fundamentals.”
Almost all of those questioned for the survey thought prices and total returns for commercial real estate investments would increase “at moderate rates”. Institutional property assets are expected to provide total returns of 9.4 per cent in 2014, rising slightly by 2016. Returns on office investments are expected to remain at 9 per cent by 2016, while retail, industrial, and apartments are all expected to moderate downward.
Looking at the US economy as a whole, the joint expectation is for inflation to grow by 1.9 per cent this year, and then increase by 2.2 per cent in 2015, and 2.5 per cent in 2016. At the same time, 10-year treasury rates are projected to continue moving up, reaching 3.4 per cent by this year’s end, four per cent by the end of 2015, and 4.4 per cent by 2016.
Even though US treasury rates will increase borrowing costs for commercial property investors, the survey respondents do not expect these changes to substantially impact on real estate capitalisation rates for institutional quality investments, which are expected to remain at 5.7 per cent this year, and then rise to 5.9 per cent in 2015 and 6.2 per cent late in 2016.
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