Real Estate Outlook
Conditions are in place for three to four years of growth in the real estate sector. The Urban Land Institute/EY Real Estate Consensus Forecast projects solid growth for the U.S. economy and continued strength of the commercial and residential real estate sectors.
<h2″>U.S. Economy
Economic growth as measured by Real GDP Growth for 2015 and 2016 is expected to be 3% according to the forecast, which is higher than the 2013 GDP of 2.2% and the 2014 GDP of 2.0%. Therefore, the economy is expected to strengthen in the upcoming years and even grow higher than the twenty year average of 2.6%. Sectors such as technology and agriculture are expected to remain strong. Also, this is a broad based recovery, with the Midwest and the Coastal regions seeing growth.
Employment is expected to grow by 8.23 million jobs over the next three years, with the unemployment rate leveling off at 6%, which is in line with the 20 year average. At the height of the recession in 2009, unemployment was at a staggering 9.9%. Strong employment and GDP will drive the economy in the upcoming years and in turn will drive the real estate market.
<h2″>U.S. Real Estate
U.S. real estate values have been increasing since the lowest point in 2009. This is evident in the capitalization rate compression from 6.9% in 2009 to 5.7% in 2013 and it is forecasted to remain around 6% for the next few years. The main reason behind the capitalization rate compression is that interest rates have remained low. The ten-year treasury is expected to remain at 3% for the rest of 2015 and rise to 4% by the end of 2016. A low yield environment is pushing money into real estate (which currently has about a 10% return). Additionally, the US real estate market has benefited from overseas investment, such as sovereign funds, and the need for diversification of wealth.
The apartment sector has performed well since the height in 2009 with vacancy rates currently averaging around 5%. Vacancy rates are expected to remain around 5% in 2016. Rental rates are expected to remain around 3% for the next few years. There has been much discussion that the millennial generation sees that owning a house is not a good investment and that cities are a great place to live. There are more opportunities within the urban areas. The real question is can you create long term savings without home ownership? For example, many Silicon Valley companies, such as Google, have expanded their San Francisco offices, in part, because many younger tech workers prefer to live there. Currently, San Francisco is one of the hottest real estate markets in the country for both office and residential space. It is important to note that single family housing starts are projected to increase to 800,000 in 2015 and 912,500 in 2016 from a low in 2011 of 430,600. Also, home prices are expected to rise at a 4% pace in 2015 and 2016. Alternatively speaking, as rental rates rise in cities, many middle income families may get pushed out to the suburbs. It will be interesting to see in the upcoming years if home ownership decreases and if rental rates increase.
The office market has remained strong with vacancy rates declining from about 16.5% at the height of the recession in 2009 to roughly 14% currently. Office vacancy rates are expected to continue to decrease to about 13.9% and 13.4% in 2015 and 2016. Additionally, office rental rates will increase approximately 4% in 2015 and 2016. There has been a low supply of office space dating back to 2008 and even in the last fifteen years. This is because office development slowed due to the high amount of sublease space that was on the market after the dot com crash in 1999 and 2000. It took years for the market to absorb this space. Furthermore, since the millennial generation wants an urban lifestyle, many suburban office parks are being transformed into community developments, such as hospitals.
The retail rental market still has not fully recovered from the recession. While vacancy rates are slowly decreasing from a high of 13% in 2010 to about 11% forecasted in 2015 and 2016, the change in retail rental rates are still below pre-recession amounts. This suggests that the retail sector has not fully recovered from the recession. Rates at their lowest point were -5.0% in 2010 and are projected to increase 3% a year. Even at 2% per year, retail rents are increasing at a higher rate than the 20 year average. With a strong economy, we are likely to see high consumer spending and eventually retail will catch up with the growth that we see in other sectors.
The industrial warehouse sector vacancy rate has declined and is forecasted to remain around 10% in 2015 and 2016 from a high of 14.3% in 2009. The economy is expected to remain strong (with GDP increasing) over the next few years and this correlates with a strong industrial warehouse sector.
Lastly, the hotel sector will continue to strengthen, with hotel occupancy rates rising to 64% in 2015 and 2016 from 63% in 2014. It should be important to note that forecasted rates in 2015 and 2016 exceed pre-recession occupancy rates of 63%. The change in hotel revenue per available room (RevPar) is projected to be 5.5% in 2015 and 4.0% in 2016. This is below the 10 year peak of 8.6%, but it will still be higher than the 20 year average of 3.2%. Therefore, the travel and tourism industry should continue to see strong fundamentals.
In conclusion, the US real estate and economy outlook remains strong with positive growth. However, there are always unexpected events that can hinder its progress, be it geopolitical concerns or concerns over rising interest rates.
The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals.
