Economic Update – Still Strong. Entering the Boom Phase?September 12, 2018
Cushman & Wakefield just released an economic update on the commercial real estate markets. We found the market to continue to look strong. By nearly every relevant metric, the economic backdrop pertaining to the property markets is in excellent shape. Real GDP growth has averaged approximately 2% per annum throughout most of this nine-year expansion, but it cranked up to over 4% in the second quarter of 2018, and the momentum will likely continue through this year and well into next. Helping to bolster growth are massive tax cuts and government spending increases. The labor markets are also humming along, continuing to demonstrate strength beyond their years. Some bullet points of what is in our recent report are:
The economy is running on all cylinders.
- Ninety-five and counting—the U.S. economy added 201,000 jobs in September, the 95th consecutive month that employment has increased. There are 2.3 million more people working in the U.S. than a year ago.
- That’s 2.3 million more people earning an income and spending it on goods and services. And 2.3 million more people who are working in offices, factories, warehouses, stores or other locations, all of which use real estate.
- And wages may finally be taking off. One of the biggest puzzles in today’s economy has been the stubbornly slow growth in wages. However, in August, earnings increased 2.9% from a year ago. This is the fastest increase in wages in almost a decade, since May 2009.
- So not only are more people working, but they are making more money, which will lead to more spending on goods, services and experiences.
Manufacturers and consumers are optimistic.
- According to the Institute for Supply Management, purchasing managers in the manufacturing sector were very optimistic in August. The Purchasing Managers’ Index jumped to its highest reading since 2004, a sign that manufacturers are seeing strong demand for their products.
- The optimism extends to consumers as well. The Conference Board’s Consumer Confidence Index jumped to its highest level in almost 18 years. Consumers are as optimistic today as they were at the height of the 1990s boom.
- Commercial real estate is tied to every segment of the economy. It’s one of the things that makes our business so dynamic and resilient. There is always demand from one sector or another. Today, every aspect of the economy is strong, driving growth in every one of our business lines.
Debt markets remain highly supportive.
- The most recent data from the Mortgage Bankers Association shows that originations increased 2% in the first half of the year, compared to the same period in 2017—itself a record year.
- The increase has not been uniform across lenders. Commercial mortgage-backed security (CMBS)/Conduit lenders have pulled back slightly (-2%) as have commercial banks (-12%), while life insurance companies (7%) and government-sponsored enterprise (GSE,14%) have stepped up originations.
- Unsurprisingly, given the strong GSE activity, multifamily originations were up 17% YoY in the first half. Hotel originations were up 31%, continuing the strong pace set in the second half of 2017. Retail and health care originations, however, have declined (11% and 30%, respectively) while office and industrial are roughly flat (-3% and 0%, respectively).
- Delinquency rates are at or near historic lows for most investor groups, including banks, life insurance and GSEs. CMBS delinquencies, while above all-time lows, are at the lowest levels of the current cycle after ticking up somewhat during 2016/17, when the market absorbed the wall of maturities.
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