Responses to the latest ULI Real Estate Economic Forecast, a semi-annual survey of economists and analysts at leading real estate organizations, reveal both a bullish and increasingly optimistic outlook on the U.S. economy and real estate fundamentals. Expectations for 2018 and 2019 have improved over the last six months overall, though growth is still expected to moderate in 2020.
If the economy continues to expand, albeit at a more moderate rate, it will surpass the current cycle record at 120 months in mid-2019, becoming the longest U.S. expansion since World War II.
ULI notes that this survey was completed before the announcement of new tariffs involving the U.S. and China, which could dampen future forecasts and economic growth from 2019 on. “One of the wild cards in the inflation expectation is the trade war,” says Tim Wang, managing director and head of investment research at Clarion Partners, a participant and panelist in the survey. “We just don’t know how it’s going to play out… If there’s a full-scale trade war, inflation could go higher than 2.5%.”
The U.S. GDP, which rose by 2.2% in 2017, is forecast to grow by 3.0% in 2018, up from 2.8% in the last forecast. This will mark the highest growth rate in a given calendar year in the current cycle. The GDP is expected to rise 2.5% in 2019, then moderate to 1.7% in 2020. Job growth is forecast to reach 2.4 million new jobs in 2018, then fall to 1.9 million in 2019 and 1 million in 2020, which would mark the lowest annual job growth in 11 years. The national unemployment rate is forecast to drop to 3.8% in 2018 and 2019, but rise to 4.0% in 2020.
The 10-year treasury rate is expected to rise closer to its 20-year average over the next three years, from a projected 3.0% in 2018 to 3.5% in 2020, which would be the highest yield in 11 years. The Consumer Property Price Index is expected to rise by 6.0%, 5.0%, and 4.0% over the next three years. NCREIF cap rates are expected to remain steady at 5.0% in 2018, then rise to 5.1% in 2019 and 5.3% in 2020.
Despite ongoing apartment supply growth, ULI notes that the multifamily sector has performed very well in recent years. Rent growth was positive for the eighth straight year in 2017 at 1.8%, though the rate of rent growth has fallen from a recent high of 4.4% in 2014. Growth is expected to reach 2.9% in 2018, then moderate to 2.5% in 2019 and 2.0% in 2020.
The apartment vacancy rate fell from a high of 7.1% in 2009 to a low of 4.6% in 2015, and has since risen to 4.9% in 2017 but remains below the 5.3% 20-year average. ULI projects vacancies will remain steady in 2018, then rise to 5.0% in 2019 and 5.2% in 2020. On the whole, the vacancy and rent growth forecasts for 2018-2019 are more optimistic now than in April 2018, though the 2020 forecast remains unchanged.
Equity REIT total annual returns were positive at 5.2% in 2017, though they remain below the 10.8% 20-year average. Returns are forecast to remain positive yet low, with 4.0% returns in 2018 and 2019 and 4.2% in 2020. NCREIF total annual returns for apartment properties are expected to moderate from 6.2% in 2017 to 6.0% in 2018, 5.5% in 2019 and 5.0% in 2020.
Real estate transaction volume across all sectors is expected to drop by 3% from 2017, down to $475 billion in 2018, $450 billion in 2019 and $415 billion in 2020. Volume has moderated significantly from its cycle peak of $569 billion in 2015, but remains above the $313 billion 20-year average. Single-family home starts are expected to rise to 900,000 in 2018 and 930,000 in 2019 before falling back to 900,000 in 2020.