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Numbers to know: Real estate consensus forecast

By Joe Salimando

Most folks know there are two reasons to build a commercial building if your company isn’t going to fill it with your own employees. One reason is for rent income, rising over time. The other reason is you can sell the building, as building values rise.

Here’s the consensus forecast for building-flipping (sales) of commercial buildings, as fashioned by the Urban Land Institute (ULI):

Among other things, this seems to indicate better days ahead—looser lending practices, a better environment for the flipping of commercial buildings and perhaps more commercial construction.

About the report

ULI’s forecast is available online at no cost.

ULI obtained responses from 38 economists on 26 economic and real-estate indicators—projections of what could happen in the next three years. The numbers are presented as a consensus industry forecast.  

The report is worth a read because many electrical distributors—although doing relatively well in 2011-2012—would do even better if the commercial building construction market niches enjoyed a real recovery.

Positive, but not overly so

In tone, the forecast is positive on the near-term future, but not delirious. For example, here’s the office vacancy outlook:

Further, unlike many forecasts and projections one can find, the ULI data are not uniformly thrilled with the furthest-out year (2014). As the result, one can find projections—like the one below for hotels—that do not forecast “hockey-stick-like” growth toward the end of the forecast period:

Base assumptions

Two of the broad-economy projections in the ULI numbers might be worth noting. Inflation over the period—and the interest rate the U.S. government could have to pay in 2013-2014 on 10-year treasury paper.

Note that ULI’s forecast carries a March 2012 date. On April 25, the Federal Reserve Board updated its forecast and numbers. For inflation, the Fed projects increases in PCE inflation (all of it, not just “core”) at 1.9% to 2.0% for this year, 1.6% to 2.0% for next, and 1.7% to 2.0% for 2014. 

For 10-year treasury bonds:

By way of contrast, on May 9, 2012, the 10-year’s yield (at market prices) was 1.82%.

If the ULI projection comes to pass, by the time 2014 ends, those who purchased 10-year U.S. government bonds recently (at the 1.82% yield) would be heavily under water. That means if they chose to sell those holdings, they would get roughly 50% of the price paid in 2012. 

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