The US Economy Accelerates While Waiting for Washington to Finalize Deals

While the overall economy remains very healthy on a relative basis, and may in fact be finally showing signs of more robust growth, deal making in Washington will stand as a key influence in determining when – and if – such robust growth will come to fruition. The stock markets have set recent highs in part because Trump appears more willing to make “deals” with Democrats in order to get policies implemented. These deals historically lead to significant tax reform, something the market is already factoring into future expectations. While market analysts place expectations on the potential for a major boost in business investment, and even hiring, this will take time to come to fruition, if ever.


Economic Health

Overall estimates of Gross Domestic Product (GDP) growth for the third quarter of 2017 increased to 3%, a key level that is considered the minimal threshold for robust economic growth in the US. Whether this growth is sustainable, however, is yet to be determined.


The beginning of the third quarter saw slightly lower job growth in August, with 156,000 added jobs per the Bureau of Labor Statistics, and a minor uptick in unemployment to 4.4%. While these shifts are slight, these numbers are representative of an overall tight labor market.


In 2016, median household income hit an all-time high at $59,039, according to the Census Bureau. These higher incomes are no doubt contributing to the still high and rising levels of consumer confidence, up to 122.9 in August of 2017, according to the Conference Board.


Third Quarter Impacts

Meanwhile, the third quarter will likely see distorted results in economic indicators due to the temporary effects of the hurricanes impacting the Southeastern US; a recent report by the Census Bureau showed monthly retails sales in August have gone down -0.2%, likely due to Hurricane Harvey. With Irma impacting Florida, there will be broader effects in the short run. In the long run, the rebuilding effort has the potential to have a positive impact on economic growth.


Commercial Real Estate on the Rise

Interestingly enough, what remains steady and more certain in these economic times is commercial real estate. CoStar reports continued growth in commercial real estate prices, up 1.2% in July. Also of note, REITs posted their largest gain in Funds From Operations (a measure of cash flow) in the second quarter of this year at 7.9%. By contrast, the many stock market indices appear highly valued on a relative basis.


If the economy does not grow at a more robust rate, a likely result if Washington remains in a stalemate, then stock prices could be negatively impacted. Commercial real estate, however, is generally showing signs of demand outpacing supply according to many data providers including REIS. In addition, new construction is flattening rather than accelerating; overall it was down 0.6% in July according to the Census Bureau and has remained mostly flat for all of 2017.


As a result, it is evident that the real estate sector is on far more solid footing than the broad stock markets. Investors should consider rebalancing from stocks and bonds and into real estate, especially while mortgage rates remain so low. In fact, research from the Mortgage Bankers Association shows availability of commercial real estate debt continues to increase in 2017 from 2016, thus it is actually getting easier to invest in real estate today.

Early Summer 2016 Commercial Real Estate Update

Investing in Commercial Real Estate for Stability

Present economic conditions are teetering on the edge of flat to very slow growth causing rising fears of a sustained slowdown. The catalysts of these issues are reductions in employment and investment in energy production and a general tapering of demand from overseas. The result to the United States as of June 2016 has been three months of below 200,000 hiring (only 38,000 in May), below 1% GDP growth (0.8% annualized in latest first quarter estimates), and flat growth of corporate profits. Not surprisingly, some investors are worried.

Charlotte - July Economic Update
Charlotte, NC

Those making the jump to say that slow economic growth equals a real estate downturn, or even the feared “bubble” should stop and take stock of the fundamentals. Occupancy rates for all major categories of commercial real estate, even apartments, are stable and improving nationwide. In fact, a recent Yardi Matrix report even states that the “worst” major metro it tracks is Houston, and its apartment occupancy rate is still 94.7% where energy price pains are the worst. Rents are generally still growing for all property types as well, even apartments. This point was also made clear by the same Yardi Matrix report stated that nationwide rents hit another all-time record high in May of $1,204 per month. If rents are rising and so are occupancies, then there is one simple conclusion; demand is still outpacing supply. That is a buying sign, not a selling sign, all else equal.

Supply Not Matching Increasing Demand

New supply, which has increased in the past few years, especially in the multifamily sector, may have trouble expanding in the future. Lenders appear increasingly stringent in providing development financing and labor and construction costs are not predicted to slow their perpetual increases. In fact, the internal, less discussed measures from the government jobs report show that hourly labor costs rose 3.9% in the first quarter. Thus, it appears that a part of the slowing pace of hiring is a cost constraint; not necessarily a falling demand issue. Developers of real estate have known this pain for years; they repeatedly tell stories of projects delayed and slowed due to labor shortages. For the commercial real estate market, this means that the supply and demand balance is likely to remain in favor of landlords, even if user demand cools moderately.

Those considering investing in real estate should look at these facts; solid fundamentals, low levels of new supply, and low interest rates when analyzing the next acquisition. Yes, it should be noted, that one great benefit of tepid economic indicators is remaining low interest and borrowing costs. The Federal Reserve is far less likely to push interest rate increases in 2016 than earlier thought and borrowers should take advantage of this. Plus, the real return to bonds and stocks is likely to drag lower compared to real estate, especially when considering the global exposure of many publicly traded companies. Real estate can provide a real income yield, supply and demand suggests that it can grow, and best yet, it can grow with inflation when and if it starts back up. Real estate offers income and stability in these types of economic climates; even REITs have outperformed the general stock market in 2016 to prove the point.

Investors Seeking Affordable Stability

Austin - Economic Update
Austin, TX

There is one theme that investors should keep mind, that is “affordability.” Rents can only rise as high as incomes (personal or business) can support. Growth patterns show people and firms moving from high-rent “24 hour” cities (New York, San Francisco, Los Angles for example) to lower rent “18 hour” cities (Nashville, Charlotte, Orlando, Phoenix, Austin for example). Thus, while the major markets have been the leaders in the past few years, it’s logical to expect the “secondary” markets to be the relative winners for the next several years. If a property provides great value and utility at a relative “affordable” price point; then it is best positioned to provide stability in all economic environments.

In conclusion, it would be a mistake to equate minor economic jitters with impending doom, as many on television like to do. The United States went through a significant downturn from 2008 through 2012, but frankly hasn’t grown that fast since. Thus, the economy really is not possibly “overheated” as it was last time. Since commercial real estate is undersupplied on a relative basis, it may actually be one of the best investment categories in the near to long term; a totally different starting point than in 2008.

To learn more about the current CRE market and economic conditions, read the SVN Commercial Real Estate Cooperation Report here.

[bctt tweet=”There is one theme that investors should keep mind, that is affordability #CRE” username=”svnic”]

US Commercial Real Estate Markets After BREXIT

Analysis for SVN CRE Colleagues and Clients

Last week the world woke up to the implausible, the United Kingdom voting to leave the European Union. Immediately global and domestic equity markets have been volatile with rapid downside moves while perceived “safe” assets such as gold and US Treasury bonds soared in price. REIT stocks, perhaps a leading indicator of the market reaction and a flight towards the tangibility of commercial real estate, have fallen less than the market averages in the days since the BREXIT. All of these reactions, and most that will occur in the coming weeks, are simply reactions to the uncertainty; as nothing has really happened yet. Here is what is known so far:

  1. The UK will suffer from the uncertainty in the short term and probably the long term, assuming Parliament moves forward with the voters’ wishes. Local and especially multinational firms are undoubtedly going to curtail plans for investments in the UK and may even scale back workforces – or at a minimum – rethink future hiring decisions. This alone can and probably will put the UK into a recession, the severity of which could be high if the uncertainty persists. The main unknown factor is how the European Union will react; if they seek to be punitive and harsh to serve as a warning to other countries considering defection, then this could be an ugly “divorce”. Since the UK did not adopt the Euro, this “divorce” is somewhat analogous to a couple separating who never joined finances – still chaotic but not as bad as it could be.
  2. The British Pound will remain low and the US Dollar high. The currency moves, mainly a flight to Dollars from Pounds and Euros, should persist for some time, with higher volatility of course. This will harm the UK the most, and the US will see some benefits in terms of lower fuel costs and prices of import goods. Conversely, US exports will be more expensive so trade flows could become more imbalanced. According to the Wall Street Journal, the UK only accounted for less than 5% of US export volume, so the direct effect should be minimal. Nevertheless, the commercial real estate sectors serving trade and manufacturing could see decreased demand in some instances.
  3. Interest rates in the US are likely to remain low. The “flight to safety” has made US Treasury bonds of all maturities very popular and thus yields are likely to stay low for some time. Further, it is far less likely that the Federal Reserve will move rates up or take other tightening measures this year. This has broad reaching benefits for the domestic real estate markets all around.

BREXIT May Benefit the US Commercial Real Estate Industry

While the jury is still out on the final impacts to the US economy and real estate markets, most noted economists believe that BREXIT will have relatively minimal impacts directly on the US macroeconomy. Further, the flood of capital will actually provide some benefits and firms may direct investment dollars and expansion plans to the US and away from the UK and Europe. To the downside, the strong dollar will hurt export trade and possibly tourism, which has been facing headwinds from overseas for several quarters already. The large multinational corporations with international revenue could see weaker revenue and profit forecasts in the coming years without question. Still, overall “Mainstreet USA” is not likely to see immediate direct effects. When watching the moves of the stock indices it is important to remember that those firms derive anywhere from 30% to 70% of their revenue from outside the country on average; thus a stock market “crash” does not necessarily mean a domestic calamity.

Commercial real estate in the US is most likely to benefit based on what seems probable at this time. Investors seeking yield and safety will find that our real estate assets are a relatively safe place to park capital. The tangibility and low volatility of commercial real estate – even in low cap rate markets – stands to attract investment into the US property markets. This likely flood of capital and lower interest rates could actually cause prices to increase in many markets, especially the major “24-hour” hubs that foreign investors historically prefer. While the long term is far less certain – and there is undeniable risk that the BREXIT could serve as catalyst for a global recession – US commercial real estate looks to be an attractive investment even in those scenarios.

Follow Kevin Maggiacomo on Twitter: @Maggiacomo.

[bctt tweet=”Commercial real estate in the US is most likely to benefit based on what seems probable at this time. #CRE” username=”svnic”]

The Good News…

Recent events in the market, including the drawn out debate over the budget ceiling, Friday’s downgrade of the US credit rating and today’s downgrade of Freddie & Fannie by Standard & Poor’s, coincide with new data that show the broader economic recovery has slowed in recent months. Bet I’m not telling you anything that you didn’t already know.


These developments, alongside heightened volatility in stock markets, have obviously prompted concerns about the resilience of the commercial real estate recovery. In assessing what all of this means for the investment outlook, our clients are looking to us for leadership and a more balanced, long-term assessment of the future. Along those lines, and while I could certainly fill this post with a summary of the downside risks stemming from recent events which have recently imbued the blogosphere, the following is a different but pragmatic take on the road ahead – the market is currently sensitive to the downside risks, but it is also prone at this juncture to discount positive information. There is some good news, which stands apart from the cacophony of recently sounded panic alarms.
Continue reading “The Good News…”