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Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
What the heck is “moderating?”
Seems pretty simple to me. Real estate values go up, and real estate values come down.
But I’ve never heard of them “moderating.” Until now.
It came from a survey of U.S. real estate economists done by a pseudo-governmental organization called the Urban Land Institute (ULI). I read the survey. And most of the information that came back was bad.
Not that that should come as a surprise. I recently posted a list of economic factors that you should be paying attention to. And just about all of them pointed to bad news for real estate.
So I guess “moderating” is simply ULI-speak for “bad.”
The survey results started bad and got worse. The 2 opening statements were:
“The latest survey of U.S. real estate economists shows continued declines in expected economic and real estate growth rates.”
…
“Compared with six months ago, real estate economists have reduced their expectations about economic growth, interest rates, commercial mortgage–backed securities, housing starts, and private real estate returns.”
That’s pretty comprehensive badness if you ask me.
But the highlights of the survey get even better. Or worse. Depending on your perspective…
Several of the items they highlighted…
On the Economy
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U.S. gross domestic product (GDP) will grow by 1.8% in 2016, a drop of 40 basis points since the last forecast and 100 bps over the past year.
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The forecast for 2017 is down by 20 bps to 2.1%.
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The 2018 forecast is unchanged at 2%.
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While U.S. trend-line GDP growth was once 3%, the economy has not achieved that rate of growth since 2005.
On the Overall Real Estate Market
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Real estate transaction volumes will fall by 13% in 2016 from the 2015 peak of $545 billion.
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The 2016 forecast is down by $50 billion from the spring forecast.
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Transaction volumes will gradually decline modestly in 2017 and 2018.
On Commercial and Rental Real Estate
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The consensus is for only $70 billion in new CMBS issuance in 2016, down from $101 billion in 2015 and a forecast of $85 billion six months ago.
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Commercial real estate prices as measured by the Moody’s/RCA Index are projected to rise by 3.8% per year over the next three years, compared with a long-term average increase of 5.7%. This is a marked drop from 2015.
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Over the next 3 years, vacancy or availability rates are forecast to decline for all property types except apartments.
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Industrial availability will fall by 0.4% to 8.7% despite a healthy supply pipeline, a more optimistic outlook than 6 months ago.
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Apartment vacancies will increase to 5.3% in 2018.
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Forecast returns are down slightly from earlier this year.
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Total returns should average 7.1% from 2016 to 2018, below the long-term trend of 10.2%.
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The forecasts for 2017 and 2018 are 7% and 6%, respectively, with the income yield rising to 5.5% in 2018 from 5.1% in 2015.
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The single-family housing outlook deteriorated over the past 6 months (and year), with starts climbing to 875,000 in 2018, below the long-term average of 1 million per year.
And they said that means…
The ULI concluded their take on the survey results this way:
“In summary, respondents to the October 2016 ULI Consensus have revised expectations down as economic growth continues at less-than-stellar levels.
The length of the current expansion may weigh on forecasters’ minds, as well as uncertainty about the upcoming presidential election and economic and political turmoil abroad.
U.S. real estate markets are intricately tied to the broader economy and capital markets, both of which are growing more slowly than earlier in the cycle. It is no surprise that the real estate market is following suit.”
Basically, they’re echoing what we’re already seeing in our markets.
Let’s be careful out there.
Chime in
Share your thoughts in the comments section below.
Dennis Fassett
earned a BS in Economics and followed that up with an MBA in finance. After working and corporate finance and banking for several years, he started buying single family houses, and quickly built a very nice portfolio of cash flowing rentals. When the credit markets started to dry up and he couldn’t get any additional single family mortgages he shifted his focus to apartment buildings. He now has over $3 million in rental real estate. He manages most of it his self and still has a day job. Dennis has even created his own Private Equity fund to buy apartment buildings.