A 'Goldilocks economy' for commercial
real estate
Andrew J. Nelson, chief economist/USA for
Colliers International
Thursday, 5 Mar 2015 |
12:53 PM ET
CNBC.com
More
than five years since the official end of the Great Recession, this is shaping
up to be a recovery for the ages — and for commercial real estate.
Certainly
this isn't what anyone would term a "dream" recovery. The U.S.
recovery is outpacing the U.K. and especially Europe but is still well off the
typical pace of recovery after a recession. And even though GDP is growing,
we're still not making up for lost ground at all.
And
yet, scratch the surface of this seemingly ugly recovery and one sees a more
attractive inner beauty to this expansion, particularly for the commercial
real-estate sector: robust enough to fuel tenant and investor demand for
property but not so strong as to overheat markets and induce unneeded speculative
development. As a result, vacant space is filling up; albeit much slower than
typical for the expansion phase of the cycle, but filling up just the same.
All the
key drivers for property demand are trending in the right direction:
*
Housing markets are recovering nicely. Home sales, housing
starts and pricing are rising in most markets.
* Jobs
are back past prior peak levels and growing sharply. There
have been more jobs gains in 2014 than in any year this century.
*
Consumers, who make up more than two-thirds of the economy, are happy again because
they're back at work, their debt levels are down and they've regained their
wealth as home values and equity values are rising. All of which translates to
more consumer spending.
* Credit
markets remain benign, with interest rates and inflation both extremely low due to
the slack in the labor and commodity markets, which is a great foundation for
both business and financial investment.
All of
these factors are driving demand for all types of real estate, which means
absorption is strong and growing for all sectors, even if it is below long-term
averages, especially for a growth period. Plus, the best years are yet to come
for this rebound.
Meanwhile,
despite the strong demand, supply remains quite tame by historical standards.
Construction is well below average rates and perhaps one-third to one-half of
rates typical during expansion periods for all sectors except apartments — and
even there, we are only now getting back to average rates.
The
main reason: Despite recent gains in most sectors, both occupancy and rents
remain well below prior peaks — and generally below the level required to
support new construction. Which means that we can expect several more good
years for property markets, as the surging property demand translates into
rising occupancy and rents for existing properties.
Of
course, our economy faces some risks, though compared to where we've been, the
risks are rather benign. They include:
*
Foreign economic slowdown. This is now the
biggest risk for the U.S., compounded by the surging U.S. dollar, both of which
may limit our exports.
*
Geopolitical turmoil. This seems a less immediate threat, though with
potentially greater downside implications.
* End
of the Federal Reserve's
easy monetary policies. The timing and market
reaction are still to be determined.
* How
much longer can the recovery continue? The expansion already
exceeds the post-WWII average.
But
these negative risks are balanced by the benefits of lower energy prices and
continued low interest rates, which provide important upside thrusts to the
economy. Overall, the risk profile is more sanguine and the economic outlook
more positive than it has been in many years.
In sum,
it was not a smooth ride to recovery, and for many households, it still doesn't
feel very good. But for those of us in the property sector, this really is
shaping up to be an outstanding expansion. And with all the drivers firing in
the right direction and risks relatively tame, there's still a lot of road to
run in this recovery.
You
might even say that this is a "Goldilocks economy for commercial real
estate" — not too cold, not too hot, but just about right.
Commentary
by Andrew J. Nelson is Chief Economist | USA for Colliers International, a
global commercial real-estate services company.
