Experts Project Growth in Commercial Real Estate, Housing Starts

Experts Project Growth in Commercial Real Estate, Housing Starts


A recent industry survey detects rising optimism in the commercial real estate sector and the single-family housing sector over the next few years. The survey, conducted in March by the Urban Land Institute and Ernst & Young, finds a consensus among economists and analysts that the real estate market will improve as transaction volumes rise and vacancies decline.

Commercial real estate transactions totaled about $290 billion last year and are expected to rise to $310 billion this year. By 2015, analysts expect volumes of about $360 billion.

Analysts anticipate a 50 percent increase in commercial mortgage-backed securities (CMBS) this year, up to $70 billion for the year. They expect CMBS to continue rising to $100 billion by 2015.

“After a prolonged period of uncertainty, we’re seeing a revival of investor confidence as the economy continues to recovery,” said Dean Schwanke, SVP at the Urban Land Institute.

Returns on real estate investment trusts (REITs) and institutional-quality direct real estate investments are expected to decline somewhat but only to levels in keeping with historic norms, according to the survey.

REITs should bring returns of 12 percent this year before dropping to about 10 percent next year. Institutional-quality direct investments should bring returns of 9.5 percent this year and decline to 9 percent next year.

Vacancy rates among retail properties are largely expected to decline this year and next. Industrial properties should decline to 12.2 percent this year and then down to 11.7 percent next year, according to survey respondents.

Office vacancies should be about 14.8 percent this year and fall to 14.1 percent next year, while retail properties will be about 12.5 percent this year and 12.2 percent next year.

On the other hand, apartments should post vacancy rates of about 5 percent this year and then a slightly higher 5.2 percent next year.

The single-family market is anticipated to experience a rise in housing starts and a deceleration in price increases.

After totaling about 700,000 this year, housing starts are expected to rise to 900,000 next year.

Home prices are set to rise about 6 percent this year and then by about 5.3 percent next year. While next year’s price increase will be at a slower rate than this year’s, the rate “is well above previous projections,” according to the survey.

Inflation and interest rates may also rise over the next few years, but not enough to affect capitalization rates, according to the survey.

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