This is a recap of the real estate forecast that Dr. Mark J. Eppli gave at the January, 2020 meeting of the Chicago chapter of NAIOP, the Commercial Real Estate Development Association. Eppli is the director and faculty associate of the James A. Graaskamp Center, at the University of Wisconsin-Madison.
Dr. Mark J. Eppli remains cautiously optimistic about the 2020 Real Estate industry trends. He focused on possible recession predictors, modulated by positive influences on Real Estate and property growth.
Beginning his predictions with the influences on commercial Real Estate that will continue to impact development in 2020. Eppli stated that “20-year property returns are stable and competitive (and)... property prices have appreciated at a 4.4% compound annual rate of growth over the past 20 years”. On perhaps the most positive note of the presentation, Eppli focused on the robust 3.2% average growth of property income (aside from retail).
On a more cautious note, Eppli moves on to the future of returns on Real Estate investments. “Past real estate returns have exceeded expectations, future returns will meet future expectations – barely”, Eppli explains in his presentation that returns are expected to drop from 8.90%, to 6.80%.
Moving on to the GDP summary that Eppli included in his presentation, he explains that Business investment is likely to remain slightly negative in 2020, and as consumer spending usually follows Business investment, the GDP will migrate slightly downward from 2.0% to 1.0% over the course of the year. Another important point Eppli brought up in regards to the future of Business investment, is that “ Small business CEOs remain confident while large business CEOs do not”.
Eppli went on to further explain his predicted trends in consumer spending, highlighting graphs that showcased the fact that consumers are taking less risks and are limiting large purchases and investments. However, consumer debt as a percentage of total income has been steadily trending downward since 2008, ending 2019 at just under 10%. Additionally, “private debt as a percent of GDP has fallen from 171% in 2009 to 148% today”.
However, although private debt has fallen, commercial real estate debt has grown over the last several years, peaking at $3,000,000 and multifamily debt is growing at a possibly unsustainable pace, around 8% for the last three years. Another worrying reflection that Eppli discussed is the prominence of “late cycle, covenant lite, corporate lending” in leveraged loan underwriting (covenant is the name for loans with fewer investor protections).
Ending the talk with his opinions on current industrial pricing, Eppli highlighted the perceived lack of reasonably priced spaces in Central-city offices, high-end retail, and apartments, stating “we are building 90 percent of our housing for 10 percent of our households.”