Economic forecasters project a sustained growth rate of around 2 percent for the next three years, a notable decrease from the rapid expansion seen after the COVID-19 pandemic. This consensus emerged from discussions among leading industry experts at the ULI Fall Meeting in San Francisco.
Key Takeaways
- Economic growth is forecast at 2 percent for the next three years.
- AI and technology investments are driving current GDP growth, but concerns exist about job creation.
- Tariffs are increasing business costs, with only 55 percent passed to consumers so far.
- The office real estate market faces significant challenges, especially for older buildings.
- Niche real estate sectors like grocery-anchored retail and last-mile logistics show strong demand.
Economic Outlook and Growth Projections
Economists gathered at the Moscone Convention Center to analyze current trends and future expectations. Their discussions centered on the ULI Real Estate Economic Forecast, a semiannual survey that tracks 33 key economic and real estate indicators through 2027.
Ken Rosen, a managing director with Andersen, moderated the panel. He highlighted the consensus forecast for economic growth at approximately 2 percent over the next three years. This figure marks a significant slowdown compared to the robust growth experienced in the post-pandemic period.
"We predict about 3.8 percent growth this quarter," Rosen stated, emphasizing the need for careful monitoring of emerging trends. "While we have a solid base case, we must stay alert to downside risks as the year progresses."
Emi Adachi, managing director and co-head of global research at Heitman, shared a cautiously optimistic view. She suggested that forthcoming policy changes and deregulation could lead to a slightly better growth trajectory. Adachi pointed to advancements in artificial intelligence as a potential driver for modest growth increases in 2026 and beyond, especially if regulations are relaxed under a new administration.
Current GDP Snapshot
The Atlanta Fed's latest projections indicate a 4 percent GDP growth for the current quarter. A significant portion of this growth is attributed to investments in AI and technology.
Inflation, Tariffs, and Consumer Spending
The discussion also touched upon the complexities of economic data. Tom Errath, managing director at Harrison Street, likened the current economic data to a fogged-in bay, suggesting that clarity is on the horizon but navigation remains difficult.
Sabrina Unger, head of research and strategy at American Realty Advisors, expressed concern about the economy's reliance on the tech sector. She warned of a potential "jobless expansion," where technological growth does not translate into widespread job creation, which is crucial for sustained economic recovery.
Data Collection Challenges
Panelists highlighted potential issues from a government shutdown. If essential inflation rate reports are missed, it would be the first time in 70 years such data is unavailable, posing risks for economic forecasting.
Errath also suggested that existing measurement methodologies might underestimate inflation. He warned that if current trends continue unchecked, inflation could surpass the Federal Reserve's 2 percent target, putting more pressure on consumer purchasing power.
Adachi echoed these concerns, noting that tariffs contribute to increased business costs. A recent study indicated that tariffs imposed this year are expected to raise business costs by approximately $1.2 trillion. Only about 55 percent of this cost has been passed on to consumers so far, raising questions about how long businesses can absorb the remaining costs.
Labor Market and Interest Rate Dynamics
The panel discussed the need to recalibrate expectations for job creation. Adachi suggested that due to reduced immigration, leading to diminished population and labor force growth, fewer new jobs are needed to maintain stable unemployment rates.
Errath pointed out troubling revisions to prior job growth statistics. He noted that recent data indicates 900,000 fewer jobs were created than initially reported, necessitating a more cautious approach to understanding the job market.
Regarding interest rates, Unger observed a shift in the Federal Reserve's policy. She believes the Fed is moving from a strict "hold-the-line" stance to a more gradual easing policy, balancing employment and inflation mandates.
"The potential for further cuts, especially if inflation remains under control, may provide necessary liquidity to stimulate growth," Errath added. "However, we must remain cautious, as changes in the Fed’s approach could lead to unintended consequences impacting mortgage rates and capital flows in real estate markets."
Real Estate Sector Performance
The resurgence in the commercial mortgage-backed securities (CMBS) market was a key point of discussion. Rosen highlighted that this year has been the best for CMBS activity since 2007, with tightening spreads and a more favorable financing landscape for properties, especially in major markets.
Despite this, Adachi noted caution on the equity side. Many investors remain hesitant due to uncertainties surrounding valuation levels, with significant capital waiting to be deployed.
Office Market Challenges and Opportunities
Unger raised important questions about the future of the office market. She stressed the need to consider how demographic shifts and technological advancements will influence long-term demand for office space.
- Premium AAA-rated buildings in areas like San Francisco have near-zero vacancy rates.
- B- and C-class buildings in the same areas face vacancy rates as high as 25 percent.
Unger indicated significant opportunities for reinvention in the office sector. However, she questioned the long-term sustainability of these opportunities if pandemic-induced changes become permanent. While prime office properties (the top 10–12 percent) have regained value, Unger warned that approximately 40 percent of other office assets are functionally obsolete and face significant repositioning challenges without considerable capital investment.
Errath noted that urban centers have a few desirable buildings, but the broader market, especially suburban office spaces, remains in turmoil. Many suburban offices are being repurposed into self-storage facilities, signaling a dire outlook for this segment.
Adachi and Errath agreed that converting underperforming office spaces to multifamily use is often unrealistic, raising questions about overall demand and viability in many regions.
Multifamily and Niche Asset Classes
Rosen discussed the lingering effects of demographic trends on the housing market. While there are vibrant opportunities in the multifamily sector, risks such as potential overcapacity and demographic shifts persist.
Unger elaborated on the multifamily market's complexities, distinguishing between traditional rentals and build-to-rent single-family options. She noted the popularity of rental communities among young families seeking suitable spaces for children but unable to afford homeownership.
The panelists emphasized the rising demand for niche asset classes. Errath pointed to the retail segment, which is seeing increased interest after a significant reset post-pandemic. Unger concurred, highlighting grocery-anchored retail properties as attractive investment opportunities due to their stable income potential. However, she cautioned that inline retail space, comprising smaller businesses, remains vulnerable to economic downturns.
Logistics Sector Insights
Smaller, last-mile logistics centers are experiencing healthy demand. This contrasts with larger logistics spaces, which are currently grappling with overbuilding issues.
Life sciences and healthcare real estate, once booming, now face challenges with current vacancies at 25 percent. Expected cutbacks in research funding further complicate the outlook. Errath acknowledged strong long-term potential but noted that the industry is currently oversaturated, creating a challenging environment for operators and investors.
