Economic Update 2019May 7, 2019
We’ve all been wondering when our current robust economy is going to turn. There seems to be a constant discussion on the topic and it seems as though we almost want the economy to turn for the worse. I just read a nice summary from Comerica Bank on what’s happened since January and I wanted to share a few comments on the commercial real estate market.
Comerica’s U.S. Economic Outlook Highlights:
- GDP – “GDP growth in the first quarter 2019 was stronger than anticipated, however, some of the underlying data was weak.”
- Unsustainable Growth – “The components that pushed headline Q1 GDP stronger than expected in Q1 all showed unsustainable growth…U.S. trade faces the twin headwinds of a strong dollar and a softer global economy. We expect the trade gap to revert to being a small drag on the U.S. GDP very soon.”
- Labor – “Most labor-related data looks strong…while the unemployment rate fell to 3.6 percent, the lowest rate since December 1969.”
- The FED – “Inflation has been cooler than expected. The Personal Consumer Expenditure index showed 1.6% year-over-year gain in March, and has been running below the Fed’s 2% target since last August. We still expect the fed to keep the fed funds rate range unchanged at 2.25-2.5% through the remainder of this year.”
- Risk of Recession Outlook – 20% risk of recession in the next 6 months, 33% in 12 months, 52% in 24 months, and 60% in the next 36 months.
Link to the Comerica report is here.
What are we seeing in the Commercial Real Estate market in response to these five points?
- Due to the uncertainty in future trade deals and possible tariffs being discussed, I’m seeing several companies increase their inventories. Increased inventories can result in using more warehouse space. The industrial market is below 5% vacant on a national level. The net result to companies in this sector is higher overhead costs and it is very difficult to find expansion space or cheaper alternatives to what you are currently leasing due to the lack of options.
- With the labor market being so strong, companies are viewing labor as a big challenge to their business plans. A recent trend is to use your office space as a way to attract or retain employees. In addition, I’m seeing companies acting less concerned about an incremental increase in rent if the location and configuration of the space are right and align with their business strategies. Location and configuration are key.
- If the fed keeps rates the same for the remainder of the year, I would expect investors and corporations will continue acquiring buildings. However, the challenge here will be supply, there is a limited supply of good buildings to purchase and there is a lot of competition for those assets. Buyers who are prepared and who are able to show a surety of closing will be selected as the winner in these scenarios.
Please leave your comments below, I’d love to hear your thoughts. Also, let me know if I can help you with any of your commercial real estate needs, I can be reached at 925-239-1422.