Total return from unleveraged Core Real Estate as measured by the NCREIF Property Index or NPI), has fallen relative to six months ago, notes the ULI Center for Real Estate Economics and Capital Markets.
This data point comes from a larger survey ULI conducted in April 2023 of 41 economists and analysts at 37 real estate organizations. The forecast is based on the median responses gathered in the survey, which reflect a wide range of views both better and worse.
These lower returns will be disappointing for many, but they are much higher than they were during the Great Financial Crisis, ULI said.
For 2022, NPI slipped 3.5% to 5.5%. In 2023, it is expected to drop 7.6% to -3.8% and next year it is forecast to fall 2.4% to 4.6%. Finally, in 2025, it is forecast to rise to 7%.
Compared to the 2022 to 2024 period from Fall 2022, the current return forecasts (plus the 2022 actual results) are 4.5 percent lower on average, with the greatest difference in 2023, ULI said.
Falling Cap Rates
Slipping capital rates or income yields now sit at all-time lows, moving them closer to long-term averages, ULI said.
The cap rate decline is due to predicted rent growth, which should lead to increases in net operating income.
ULI said that economists predict that the overall NPI capitalization rate will increase to 4.8% by 2025, up from 4% in 2022, the lowest capitalization rate on record.
This remains below the long-term average of 5.5%, “but [is] a reasonable level given the forecast 10 Year Treasury rate of 3.15 percent in 2025,” ULI wrote.
Economic Indicators
Sentiment overall is little changed in the Spring forecast, featuring minor improvements, if anything.
The 2023 GDP growth forecast improved to 0.9% from 0.5%, while the 2024 GDP forecast fell to 1.5% from 2.1%, leaving the two-year average nearly the same.
The survey found that economists expect that, after “subpar performance this year and next, the economy will approach normal growth patterns in 2025, with real estate slightly lagging, depending on property type.”
Source: www.globest.com
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