What Does the Future Hold for the U.S. Economy?

November 26, 2018

Tax Incentives for Buyers, Tax Reform, Real Estate Professionals and the Global Marketplace

Could There Be Clouds On The Horizon

George Ratiu, Managing Director of Housing & Commercial Research, NAR

We are headed into the final stretch of 2018 with an economy poised to register the highest annual rate of growth post-Great Recession. Fueled by unprecedented monetary policy and the recent tax reform, economic activity accelerated this year. Employment gains have pushed the unemployment rate below 4.0 percent and boosted real wages. Consumer optimism has reached levels not seen since the early 2000s, which has spurred broad-based spending on houses, cars, furniture and appliances, recreation, and travel. In turn, rising employment and consumer spending have driven demand for commercial real estate, leading to solid fundamentals and rising cash flows.

However, clouds are gathering on the horizon as we approach the 10-year anniversary of the economic expansion. The Federal Reserve is engaged in the third year of monetary tightening, having raised short-term rates eight times. As short-term rates continue upward, long-term interest rates will mirror the trend, increasing borrowing costs for both consumers and businesses. In addition, the strong demand for housing has elevated prices, which coupled with a significant supply shortage, has decreased affordability to levels last seen in 2007 and early 2008. Also casting a long shadow over the economy is the current trade war and the NAFTA renegotiations, which are adding upward pressures on consumer prices. While the outlook for 2019 retains a sunny disposition, we can expect it to be partly cloudy in parts of the year.

Investor Hesitancy Fades As Fears Emerge Over Price Growth

Jim Costello, Senior Vice President, Real Capital Analytics

The headline figures for commercial property sales activity through July are up 4% relative to the same period a year earlier. Some of the growth was due to one-time platform plays, but even the sale of individual assets is growing.

Along with this growth in deal volume, prices are still climbing. The RCA CPPI was up 7% YoY through mid-year 2018. This growth is not the double-digit pace seen earlier in the cycle, but combined with growth in deal volume it highlights that some of the investor hesitancy present in the last two years is fading.

Yes, there are expectations that the 10yr UST will climb further from the current levels, and there are fears that this growth will eventually take the wind out of price growth. Even with these fears, deal volume can continue to grow because of the comparatively healthy yields the sector offers.

Global Gains And Structural Shifts Leave A Mark On Commercial Real Estate

Rebecca Rockey, Economist, Americas Head of Forecasting, Cushman & Wakefield

Many factors drive commercial real estate performance: In 2018, a reacceleration of economic growth, supported by domestic fiscal policy and stronger global economic growth, benefitted commercial real estate leasing fundamentals and capital markets conditions. A stronger U.S. economy buttressed job growth; more jobs across more industries led to more optimistic consumers and ultimately businesses. While partially a result of lower taxes on both individuals and companies, a healthy consumer segment was only part of the story: an acceleration in the global economy in 2017, which has continued into 2018, boded well for the industrial sectors, despite continuing uncertainly around trade agreements.

Over the next year, structural shifts, such as eCommerce, will continue to leave a mark on the industrial and retail sectors. For the office sector, the labor market will become increasingly important. Tight conditions will pressure wages and make the competition for talent more intense. Labor shortages are likely to intensify, especially in the construction, transportation, warehousing, and office-using industries. Demand metrics across most property types will see healthy, but decelerating demand. Inflation is firming enough to allow the Federal Open Market Committee to continue raising the fed funds rate through next year. And while historically low interest rates and record-high fund-raising are positives for the capital markets, investors will continue to see challenges in the face of moderating fundamentals and rising supply, causing niche, value-add, and opportunistic strategies to become increasingly mainstream.

Strong Multifamily Fundamentals Face Increasing Cross-Winds

The U.S. economy continues to chug along, and we expect GDP to continue its modest but steady growth for the next 12 to 24 months. Inflation is rising, but not to concerning levels, and fiscal policy is mildly pro-growth. Two cautionary yellow flags: 1) The yield curve is flattening, and is close to, but not yet, inverted. This bears close monitoring. 2) The labor market is tight. Another 2%, or approximately 2.6 million prime-age workers remain on the sidelines, however a skills and location mismatch remains, and many industries cannot fill their job needs. In order for GDP to really grow we need to see continued strong labor productivity growth.

Multifamily fundamentals are strong, but the market is facing increasing cross-winds. Multifamily capital is abundant, however financing and development costs are rising. Demand is strong, but shifting to lower-cost cities, and new supply deliveries are weighing down on several secondary tech markets. Though there are still plenty of opportunities in the multifamily market, it is becoming a sharpshooter’s game in the short term, and investors need to be much more strategic with their placement within markets and submarkets. Long term demographic fundamentals remain favorable for the apartment industry.

Fiscal Stimulas And Fed Policy Attempt To Fill The Balloon Without Overinflating

Ryan Severino, CFA, Chief Economist, JLL

The fiscal stimulus implemented in 2018 not only supported the economy and commercial real estate in 2018, but should also continue to do so into 2019. Stronger economic growth is spurring job creation, modest wage growth, and spending on the part of consumers and businesses. All of these support demand across the spectrum of commercial real estate property types.

With the labor market likely operating below the non-accelerating inflation rate of unemployment (NAIRU), the Fed’s focus turns to price stability, embodied in their 2-percent target rate of inflation. The Fed will continue hiking rates, attempting to keep things from overheating while also not throwing the economy into a recession.That sets the stage for a tug of war between fiscal policy propelling the economy forward and monetary policy attempting to keep things from spiraling out of control. While rising interest rates tend to let the air out of the balloon, allowing things run too hot for too long risks overinflating, which could cause a sudden pop.

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