The forecast anticipates an increase in inflation and interest rates as the economy continues to improve. For 2013, it predicts that the Consumer Price Index (CPI) will increase to 2.0 percent, then rise to 2.5 percent in 2014 and 2.9 percent by the end of 2015. Ten-year treasury rates are projected to rise to 2.3 percent by the end of 2013, 3.0 percent in 2014, and 3.5 percent in 2015. The report points out that while rising rates will increase borrowing costs for real estate investors, the higher costs are not expected to have a significant impact on real estate capitalization rates, which bodes well for commercial real estate values.
Commercial Property Expectations Mixed
The report anticipates that despite some cooling in the apartment sector, that property type will be the leader for 2013 in terms of returns. Apartment sector returns are expected to be10.0 percent this year, a return that is consistent with the returns projected for other commercial property types in 2013 – industrial, 9.9 percent; office, 9.0 percent; and retail, also at 9.0 percent. Returns for all sectors are expected to decline slightly by 2015; the largest drop will be seen in the apartment sector, as supply catches up with demand.
- Apartments – The forecast predicts that vacancy rates will hold at 5.0 percent this year from 2012, then edge up to 5.2 percent in 2014 and stay at that point in 2015. This year, rental growth rates are expected to be 3.8 percent, down from 4.1 percent in 2012. Rental growth rates are expected to decline to 3.0 percent in 2014 and 2.8 percent in 2015, as more units are placed on the market.
- Industrial/warehouse -- Vacancy rates are expected to continue declining, reaching 12.2 percent by the end of 2013, 11.7 percent in 2014, and 11.4 percent by the end of 2015. Warehouse rental rates are expected to show growing strength, with an increase of 2.0 percent anticipated for 2013, and 3.0 percent in 2014 and 2015.
- Office – Office vacancy rates are expected to drop to 14.8 percent in 2013, 14.1 in 2014, and 13.6 percent in 2015. Office rental rate rates are expected to decline by 3.5 percent for 2013, and then rise by 4.0 percent for both 2014 and 2015.
- Retail – Retail availability rates are expected to decline to 12.5 percent this year, then drop further to 12.2 percent in 2014 and 11.9 percent by 2015, reflecting modest improvements as the economy improves and consumer spending increases. Retail rental rates are projected to rise by 1.0 percent in 2013, and by 2.0 percent in 2014 and 2015.
The ULI/E&Y Real Estate Consensus Forecast reflects consensus reached on 27 economic and real estate indicators; the forecast for each indicator is the median forecast from the 38 survey respondents. Comparisons are made on a year-by-year basis from 2009 through 2015. The next forecast is scheduled for release during October 2013.About the Urban Land InstituteThe Urban Land Institute ( www.uli.org) is a nonprofit education and research institute supported by its members. Its mission is to provide leadership in the responsible use of land and in sustaining and creating thriving communities worldwide. Established in 1936, the Institute has nearly 30,000 members representing all aspects of land use and development disciplines. About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information, please visit www.ey.com. SOURCE Urban Land Institute