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First Half 2017 Economic Data Points to Goldilocks Environment for Remainder of the Year

Labor Day not only marks the unofficial end of summer, but also brings a time when the industry homes in on market activity for the remainder of 2017. With this year nearing a close, it is timely to evaluate economic markers from the first half of 2017 for indications of activity through the remainder of the year and beyond.

 

Overall Economic Factors

After a slightly anemic first quarter, the US economy resumed a more robust growth posture with GDP growth being reported at a 2.6% annualized rate, which is close to the 3% level considered a target for long run economic prosperity. Hiring has also stayed near the 200,000 monthly job creation rate, bringing unemployment back down to 4.3%.

 

Overall, the economy appears very steady and growing. The underperformance of the first quarter was likely a simple aberration due to uncertainty of the new administration. As such, almost all discussion of a 2017 macroeconomic downturn has ended, and such risks now look to be closer to 2019, if at all.

 

Commercial Real Estate Market Health

Commercial real estate markets did not change much fundamentally in the second quarter of 2017, according to data providers such as REIS, Real Capital Analytics, and CoStar. However, the rise in economic activity suggests there may be more robust leasing activity to come in the second half of 2017.

 

Overall, industrial was the strongest sector as robust net absorption from expansion of tenants such as Amazon greatly exceeded new supply. Office grew only slightly, despite the continued strength in office-using employment sectors, suggesting higher demand is coming. Multifamily continued to push rents forward as vacancy rose very slightly. Although more markets are exhibiting early signs of oversupply (such as rising concessions), the bulk appear to be absorbing new supply at a steady clip as the continued pace of job gains create ongoing demand. Retail fundamentals finally showed a response to the rise of store closings announced at the beginning of the year with many markets seeing a rise in vacancies and negative net absorption. Notwithstanding, new retail properties have opened and filled successfully, showing that “new” is always in demand, especially for retail.

 

In regard to pricing, both CoStar and Real Capital Analytics showed increases, once again setting record highs after brief declines earlier in the year. Additionally, lending activity increased 20% year over year and 28% quarter over quarter, according to the Mortgage Bankers Association’s survey of commercial and multifamily lenders.

 

While there does not appear to be a major shift in investor sentiment regarding commercial real estate – in fact, REIT returns suggest just the opposite – there is increasing concern by some about peak pricing. However, it’s interesting to note that the data does not yet support these fears. Inflation fell to near zero in the second quarter and the Fed signaled a willingness to go slower than previously anticipated in increasing rates.

 

The Goldilocks Environment Continues

Promising factors such as low inflation and steady economic growth indicate the “goldilocks” zone will continue. Unless one or both of these conditions change, there is no strong reason to believe commercial real estate prices will reverse. In fact, given rising level of global uncertainty, domestic commercial real estate may be one of the safest places to invest right now.