The Economy…have you seen the latest numbers?  Still going strong.

The Economy…have you seen the latest numbers? Still going strong.

July 11, 2018 Off By Chris

We just released our new U.S. Economic and CRE Outlook. Did you know that we are now in the second longest recovery period and by next July (2019), we will be in the longest recovery every recorded?  Nearly nine years into the current cycle, the U.S. economy is strong and all the signs say it’s getting stronger. The leading indicators that correlate well with the property markets are in excellent shape.

Of course, there is no shortage of anxiety either; there never really is. Volatility is up this year, interest rates have moved higher, the yield curve has flattened, and trade tensions are escalating. So where do we go from here?

Our mid-year outlook shares perspective on the following topics:

  • Where we are in the economic and leasing cycle
  • What higher interest rates mean for CRE values
  • The probability of a full-blown trade war and its potential impact for the property markets
  • How capital is shifting and what capital is targeting

The points I felt were very interesting were:

  • When the US Economy was growing at a rate of 2%, we saw vacancy fall, rents rise, and CRE values begin to soar.  Last quarter, we saw GDP increase by 3.9%. What should we expect the CRE markets to do with this kind of growth?
  • The last numbers show that inflation has grown by 2.7% and it’s trending up.
  • Most assumed three rate hikes for 2018 but now most are assuming four.
  • The temptation is to assume that when interest rates rise that commercial real estate values will fall but the reality is when interest rates increase, so do rents which translates into higher net operating incomes on properties, and the positives in NOI growth most often offsets the negatives of higher interest rates.  This doesn’t necessarily apply to long term leased investments which have minimal rent increases.
  • Despite the uptick in interest rates, pricing is holding extremely well in fact, CRE values increased 8% overall in April compared to a year ago.
  • Value-add assets typically see the most benefit because higher interest rates signal better lease-ups.
  • Investors should watch for future rent growth in markets where demand is high.

To read about these points and more, click the here for the full report.