“Ignore the Dow. Focus on the fundamentals.”
That’s Cushman & Wakefield’s sanguine advice in its latest “U.S. Macro Report,” in which the real estate services giant offers a bullish forecast about America’s economy, as well as the investment climate for real estate construction and transactions.
C&W provides a positive spin on investors’ two main concerns right now: the impact of China’s slower economic growth and tumbling global oil prices. The report points out that U.S. direct investment in China is currently $65 billion versus the $6 trillion the U.S. has invested globally. Only 9.2% of U.S. exports are sent to China, and exports account for only around 10% of all goods and services produced within the country. “The macroeconomic consequences of a hard landing in China tend to be overstated,” says C&W, which believes that China’s GDP growth could fall below 3% (it was 6.9% in 2015, a 25-year low) without causing a recession in the U.S.
Oil price erosion is a more significant threat to C&W’s baseline outlook, the report concedes. But it believes that declines in oil prices are ultimately a net positive for the U.S. economy because those declines spur increased consumption. “Every penny decline in retail gasoline prices adds more than $1 billion to consumer spending over the course of the year, according to Moody’s Analytics,” states the report. Its forecast calls for oil prices to average just over $40 per barrel in 2016. “That will add about 50 extra basis points to U.S. GDP growth, creating up to 23.8 million sf in additional demand for office and industrial space.”
C&W foresees a “quite healthy” 2.4% increase in U.S. GDP this year. It expects 2.6 million and 2.3 million nonfarm jobs to be created in 2016 and 2017, bringing the unemployment rate down to around 4.5%. “Wage growth and inflation should trend upwards more meaningfully at the same time, helping to buoy retail sales, consumer spending and consumer confidence.”
People are also getting their personal balance sheets in order. The household debt ratio—which measures debt affordability—is at its lowest point since 1980. Wages and total compensation rose by over 2% in 2015, the first time since 2008 those indices exceeded 2% growth.
A more confident, higher-spending consumer should benefit the industrial sector, which has enjoyed record-setting demand for warehouse and distribution space over the past few years. C&W projects that 220 million sf of space will be added this year, despite declines in manufacturing activity. “Overall vacancy will tighten further, falling from 7.5% in 2015 to 7% in 2016. This is on par with the tightest conditions ever observed in the sector; in 2000, the national vacancy rate was 6.9%,” the report states.
C&W expects that the economy will create 713,000 office-using jobs this year, and 666,000 in 2017. These estimates are slightly down from the 812,000 office jobs created last year, and C&W does expect slower aggregate demand for office space, albeit with a lag. Over the next two years, it expects 140 million sf of new office product to be delivered versus the almost 160 million sf of space that will be absorbed. “As a result, vacancy rates will continue to decline, falling from 14.2% in 2015 to 13% in 2017, the lowest annual reading since 2007.” Rent growth will accelerate to 4% this year and 4.5% next year. By 2018, new development should catch up with decelerating demand.
Positive consumer spending should also help fuel the retail sector. Net absorption is expected to average around its 2015 level (40 million sf) for the next two years, and focus on Class A product or new space. Vacancy is expected to decline from 7.7% in 2015 to 7% in 2016, and bounce below the 7% mark at times during the year.
C&W remains convinced that investors would continue to perceive the U.S. as a “safe haven” for stability and expected returns. Investors certainly showed their confidence in the U.S. economy in 2015, when investment sales volumes in the real estate sector increased by nearly 24% to $534 billion, just shy of the previous peak in 2007. “Capital markets activity is expected to be strong in 2016 and 2017 and should surpass prior peak levels assuming no major shock to the system.”
The developer acknowledges that a prolonged downturn in equity markets could short-circuit the U.S. economy, hit the consumer and end the expansion. But it doesn’t think that scenario is probable. “The fundamentals of the U.S. economy and the property markets remain on solid footing.”
Related Stories
Healthcare Facilities | Feb 18, 2021
The Weekly show, Feb 18, 2021: What patients want from healthcare facilities, and Post-COVID retail trends
This week on The Weekly show, BD+C editors speak with AEC industry leaders from JLL and Landini Associates about what patients want from healthcare facilities, based on JLL's recent survey of 4,015 patients, and making online sales work for a retail sector recovery.
Market Data | Feb 17, 2021
Soaring prices and delivery delays for lumber and steel squeeze finances for construction firms already hit by pandemic
Association officials call for removing tariffs on key materials to provide immediate relief for hard-hit contractors and exploring ways to expand long-term capacity for steel, lumber and other materials,
Market Data | Feb 9, 2021
Construction Backlog and contractor optimism rise to start 2021, according to ABC member survey
Despite the monthly uptick, backlog is 0.9 months lower than in January 2020.
Market Data | Feb 9, 2021
USGBC top 10 states for LEED in 2020
The Top 10 States for LEED green building is based on gross square feet of certified space per person using 2010 U.S. Census data and includes commercial and institutional projects certified in 2020.
Market Data | Feb 8, 2021
Construction employment stalls in January with unemployment rate of 9.4%
New measures threaten to undermine recovery.
Market Data | Feb 4, 2021
Construction employment declined in 2020 in majority of metro areas
Houston-The Woodlands-Sugar Land and Brockton-Bridgewater-Easton, Mass. have worst 2020 losses, while Indianapolis-Carmel-Anderson, Ind. and Walla Walla, Wash. register largest gains in industry jobs.
Market Data | Feb 3, 2021
Construction spending diverges in December with slump in private nonresidential sector, mixed public work, and boom in homebuilding
Demand for nonresidential construction and public works will decline amid ongoing pandemic concerns.
Market Data | Feb 1, 2021
The New York City market is back on top and leads the U.S. hotel construction pipeline
New York City has the greatest number of projects under construction with 108 projects/19,439 rooms.
Market Data | Jan 29, 2021
Multifamily housing construction outlook soars in late 2020
Exceeds pre-COVID levels, reaching highest mark since 1st quarter 2018.
Market Data | Jan 29, 2021
The U.S. hotel construction pipeline stands at 5,216 projects/650,222 rooms at year-end 2020
At the end of Q4 ‘20, projects currently under construction stand at 1,487 projects/199,700 rooms.