The U.S. real estate industry is, in general, expected to be stronger than previously anticipated through 2018, according to the latest economic forecast from the Urban Land Institute’s (ULI) Center for Capital Markets and Real Estate. The ULI Real Estate Economic Forecast, which includes predictions over three years, is based on a semi-annual survey of 48 of the nation’s leading economists and industry analysts. Responses to the most recent survey, conducted in March 2018, suggest that the industry is receiving a boost from the enactment of the Tax Cuts and Jobs Act in December 2017.

Survey participants’ expectations were higher for the U.S. economy as well as the real estate industry than in the previous survey, which occurred in October 2017. Although the outlook for stronger economic growth is accompanied by the likelihood of higher inflation and higher interest rates, the rate hikes are not projected to be detrimental to 2018 real estate returns.

The forecast, which covers 2018, 2019 and 2020, provides predictions for broad economic indicators; real estate capital markets; property investment returns for four property types; vacancy and rental rates for five property types; as well as housing starts and prices. Forecasts for industrial returns are higher than projected six months ago; while office, retail and apartment returns are expected to remain steady or be slightly lower than previously anticipated. Forecasts for 2019 and 2020 continue to show a moderating trend for all property sectors.

“The outlook for individual property sector fundamentals generally continues to reflect the characteristics of the current real estate cycle,” said ULI leading member and survey participant Andrew Warren, director of real estate research at PwC. “Fundamentals either are steadily improving or appear to have stabilized at sustainable levels. “Despite differences in performances between property sectors, there is no indication that we are about to see any imbalance in 2018 that will send any of the sectors into a significant downturn.”

Among the survey’s key findings for real estate:

• Industrial — Survey respondents continue to believe the industrial sector will outperform the market over the forecast period. The 2018 outlook for availability rates is 7.4 percent, well below the 20-year average of 10.1 percent, and is expected to stay below the long-term average in 2019 and 2020 at 7.5 percent and 7.7 percent, respectively. The low availability rate is helping to support the 2018 outlook for rental rate growth of 4.6 percent, though the growth rate is expected to slow to 3.8 percent in 2019 and 3 percent in 2020. The strong fundamentals have survey respondents raising their outlook for industrial total returns to 10 percent in 2018. Respondents forecast declining returns in subsequent years, reaching 8 percent in 2020.

• Apartment — Expectations for the apartment sector continue to moderate. Survey respondents expect the vacancy rate to increase slightly to 5 percent in 2018 and 5.2 percent in 2019, where it is expected to remain in 2020, but remain below the 20-year average of 5.4 percent. While vacancy rate projections for 2018 are unchanged from the October survey, 2018 rent growth projections are expected to decrease to 1.5 percent from the 2.1 percent projected six months ago. Rent growth rates for both 2019 and 2020 are projected to be 2 percent.

• Office — The 2018 office vacancy rate is projected to be remain unchanged from the actual 2017 rate at 13 percent, a relatively small change from the 13.1 percent projected in October 2017. It is expected to increase to 13.2 percent in 2019 and 13.4 percent in 2020. The outlook for rental rate growth reflects more optimism from survey respondents relative to the October survey. A 2.5-percent increase is expected for 2018, followed by 2 percent in 2019, both higher than the previous outlook, while rent growth is expected to slow to 1.5 percent in 2020. Similar to the apartment sector, total returns rate for this year is projected to be 5.4 percent, decreasing to 5 percent in 2019 and 4.5 percent in 2020.

• Retail — The struggles in the retail sector have been well documented, and the survey respondents see this holding back retail fundamentals. However, the outlook for 2018 and 2019 appears to reflect an expected increase in consumer spending due to the projected stronger economy. The expected retail availability rates for 2018 and 2019, at 9.8 percent and 9.9 percent, respectively, are slightly better than expectations of six months ago. The expected rental rate growth for 2018, at 2 percent, is stronger than that of the previous survey, as is the 2019 projection of 1.8 percent. Similar to other sectors, retail availability and rental rate growth fundamentals are expected to moderate by 2020, with availability projected at a rate of 10 percent, and rent growth at 1.1 percent. Total returns for retail are forecast to be 5 percent in 2018, moderating to 4.6 percent in 2019 and 4.3 percent in 2020.

• Hotel — A stronger economic outlook appears to have raised survey respondents’ expectations for the hotel sector. Survey respondents expect both the 2018 and 2019 occupancy rates to be at a post-recession high of 66 percent, higher than was forecast six months ago, before moderating slightly to 65.8 percent in 2020. The current survey also expects growth in revenue per available room (RevPAR) to be 2.7 percent in 2018, 2.4 percent in 2019, and 1.7 percent in 2020.

• Single-family — The results of the survey do not indicate much optimism that the shortage of homes for sale will be corrected in 2018. The outlook for 2018 single-family housing starts, at 923,000 homes, is lower than was anticipated in the previous survey. However, participants do expect an increase in 2019 to 987,500 starts, before moderating to 925,000 in 2020. Survey respondents expect home prices to rise an average of 5.3 percent in 2018 and 4.3 percent in 2019, both above the 20-year average annual growth rate of 4.0 percent.

Transaction volume is expected to reach $450 billion in 2018 and $425 billion in 2019 – higher than was projected six months ago – before moderating to $408 billion in 2020. Similarly, commercial mortgage–backed securities (CMBS) issuance is expected to reach $90 billion in both 2018 and 2019 before decreasing to $80 billion in 2020. The prices paid for real estate may also see some initial benefit from a higher level of transaction activity. Survey respondents expect prices to rise 5 percent in 2018, then moderate to 3 percent and 2.3 percent in 2019 and 2020, respectively.

Among the survey’s key findings for major economic indicators:

• Real gross domestic product (GDP) growth is forecast to rise to 2.8 percent for 2018, up from the 2.4 percent projected in the October 2017 survey. Higher levels of economic growth may continue into 2019 with economists predicting a 2.5 percent growth rate, up from October’s projection of 2 percent for 2019. The economists surveyed do not see an end to the current economic expansion, with real GDP growth for 2020 projected to be 2 percent.

• Job growth is also expected to get a boost in 2018 and 2019. The current survey shows expectations for 2.2 million new jobs in 2018 and 1.89 million new jobs in 2019. Job growth in 2020 is expected to be somewhat lower, at 1.38 million, but this remains above the long-term average. With the higher levels of job growth in the first two forecast years, the outlook for the unemployment rate remains low. The current survey indicates that the unemployment rate will drop to 3.9 percent at the end of 2018.

• Interest rates are expected to be 0.4 percent higher in 2018 and 2019 than previously expected, with the Ten-Year U.S. Treasury rate rising to 3.1 percent in 2018 and 3.4 percent in 2019. The ten-year Treasury rate is forecast to remain steady in 2020 at 3.4 percent.

The market survey is the most recent in a series of polls conducted by ULI to gauge sentiment among economists and analysts about the direction of the real estate industry. The next ULI Real Estate Economic Forecast survey is scheduled for release in October 2018.