Confidence Rising in U.S. Commercial Markets

---

Expectations for the U.S. commercial real estate market are much more optimistic than even six months ago, according to a survey by the Urban Land Institute (ULI). Commercial real estate transaction volume in 2013 will likely reach $310 billion, up from $290 billion in 2012, a nearly 7 percent increase, the study found. That number is expected to rise to $340 billion in 2014 and $360 billion in 2015. 

This data is part of the semi-annual ULI/E&Y (Ernst & Young) Real Estate Consensus Forecast prepared by the ULI Center for Capital Markets and Real Estate. The third in a series of similar surveys, the last one being at the end of September, this one polled 38 of the country's leading real estate economists and analysts on their expectations for the real estate industry this year and for the next several years.

According to the survey, the issuance of commercial-mortgage-backed securities (CMBS) in 2013 is expected to increase by nearly 50 percent, rising to $70 billion from $48 billion in 2012. CMBS issuance is expected to reach $80 billion in 2014 and $100 billion in 2015. This follows several years when CMBS issuance was miniscule compared to 2007's record $230 billion. 

"The (ULI/E&Y) survey suggests that despite some tapering off of price increases and returns, the commercial real estate industry will, in general, be on solid footing for the next three years," said ULI senior vice president Dean Schwanke, executive director of the ULI Center for Capital Markets and Real Estate. "After a prolonged period of uncertainty, we're seeing a revival of investor confidence as the economy continues to recover."

Meanwhile, the expectation for REITs, according to the National Association of Real Estate Investment Trusts (NAREIT), is that returns will drop, after soaring to 28 percent in 2009 and 2010. The lower returns are generally considered more sustainable. REIT returns are expected to be 12 percent in 2013, then drop to 10 percent in 2014 and 8 percent in 2015, according to NAREIT. 

Total returns from institutional-quality direct real estate investments for the apartment, retail, industrial and office sectors combined are forecast to be 9.5 percent in 2013, 9.0 percent in 2014 and 8 percent in 2015. While continuing a downward trend that started last year, these returns are in the range of long-term historical averages, according to the ULI/E&Y survey.

The projections for real estate are based on a generally positive outlook for the economy. Steady improvement is expected both for economic growth and employment. According to the latest forecast, the real gross domestic product is expected to rise by 2 percent this year, 3 percent in 2014 and 3.1 percent in 2015. At the same time, the unemployment rate is expected to drop to 7.5 percent by the end of 2013, 7 percent by 2014 and 6.5 percent by the end of 2015. The number of jobs is expected to rise by 2.1 million in 2013, 2.4 million in 2014 and 2.6 million in 2015. All of these forecasts are more optimistic than the ones derived from the ULI/E&Y survey at the end of September 2012.