Economic Forecast: Expectations High, but Less Long-Term Optimism

Liz Dominguez

Associate Content Editor RISMedia, Inc., Real Estate Magazine

The latest Urban Land Institute (ULI) Real Estate Economic Forecast predicts modest fluctuations across the board for 27 economic/real estate indicators. The three-year forecast is completed semi-annually, surveying more than 48 economists and analysts at 36 real estate organizations.

A leading concern? Rising interest rates. ULI forecasts interest rates to be 0.4 percent higher in 2018 and 2019 than previously estimated. The 10-year U.S. Treasury rate is also expected to rise, to 3.1 percent in 2018 and 3.4 percent in 2019, and then stay flat in 2020.

However, according to a recent ULI webinar — featuring Mark Wilsmann, managing director and head of Equity Investments at MetLife Real Estate; Martin Stern, senior managing director at CBRE; Richard Barkham, global chief economist at CBRE; Diana Reid, executive VP at PNC Financial Services; and Stuart Hoffman, senior economic advisor at PNC Financial Services — economists aren’t as optimistic for the long term.

“After 10 years of negative interest rates, that monetary tightening is happening in both the U.S. and China,” said Barkham. “I think it’ll slow a little bit more than in these forecasts. Because there’s more debt in the global economy than prior to the financial crisis, there’s some downside risk after mid- to late 2019. On balance, I would take a little bit more of a pessimistic view after 2019.”

With rising rates incentivizing buyers to act fast, housing shortages will continue to prove a challenge. ULI’s forecast has 2018 single-family housing starts pegged at 923,000 homes — lower than the previous estimate — with an increase to 987,500 starts in 2019 before falling off to 925,000 in 2020. Hoffman believes multi-family homes are more at risk, as millennials are aging and looking for properties they can better afford.

While new construction or redevelopment projects could ease the growing stress on the market’s low inventory, a shortage in workers and rising costs for building materials are impeding the effort.

“There’s less construction financing and less interest in doing new development deals for both cost and financing rationale,” said Reid. “Every lender and every development is looking at demographic changes, city changes…what’s going to be the demand? How much rental, how much for-sale housing, how much office space, how much industrial?”

Hoffman believes that job growth is a key driver in demand and that companies are “facing a war for talent.” Reid echoed his sentiments, and also believes the search for top talent will impact the rental market.

“Costs of construction are going up and getting worse, and there’s a focus on how to solve that,” Reid said. “The size of the population that’s looking for rental housing at affordable rates so they can have a good, clean place to live when they get the job and become part of a growing workforce is really at a crisis moment, and there will be more of a focus on that.”

ULI’s forecast expects job growth to fluctuate in 2018 and 2019, rising up to 2.2 million new jobs the first year and only 1.89 million the following year. Long-term optimism is low — ULI predicts 2020 may see a drop-off to only 1.38 million — but still above the long-term average.

Real GDP growth runs along the same vein, forecasted to increase to 2.8 percent in 2018 (above October’s 2.4 percent prediction) before dropping to 2.5 percent in 2019 and 2 percent in 2020. Predictions can change, however, as the U.S. economy has multiple influencers, including the current political climate — pending trade conflicts, the new spending bill, and the new tax law have already impacted predictions since the last survey.

“The tax cut has set the seeds for the next two or three years,” said Stern. “We’re on a sugar high — every forecast is a little better than it was before — but with that, it’s clear that we’re not going to get the kind of growth rates that aren’t going to have increases in debt. There’s a little bit more upside risk toward interest rates that could tend to slow the economy in 2020, not a lot of cap rate appreciation in property, and we need an infrastructure program that doesn’t add to the deficit. The forecast is right, but I’m seeing a little more upside risk than others are seeing.”

A version of this article originally appeared on RISMedia.com. Republished with permission of RISMedia, publisher of Real Estate magazine.