“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
Market Data | Jun 30, 2020
329 metro areas added construction jobs in May
Seattle-Bellevue-Everett, Wash. added the most construction jobs (28,600, 44%) in May.
Market Data | Jun 29, 2020
6 must reads for the AEC industry today: June 29, 2020
HQ tower features gardens on every floor and the head of Hilton talks about how his business will survive.
Market Data | Jun 26, 2020
5 must reads for the AEC industry today: June 26, 2020
Restoration of 1930s El Paso hotel completes and Arc offers tools, analytics for safe workplace re-entry.
Market Data | Jun 25, 2020
Commercial Construction Index drops amid Coronavirus pandemic, but contractors poised for near-term recovery
Contractors quickly prioritized worker health and safety, and 1 in 3 plan to hire more workers in the next 6 months.
Market Data | Jun 25, 2020
7 must reads for the AEC industry today: June 25, 2020
CDC to build the most advanced high containment laboratory in the country and architecture billings downward trajectory moderates.
Market Data | Jun 24, 2020
Architecture billings downward trajectory moderates
AIA’s Architecture Billings Index (ABI) score for May was 32.0 compared to 29.5 in April, but still represents a significant decrease in services provided by U.S. architecture firms.
Market Data | Jun 24, 2020
8 must reads for the AEC industry today: June 24, 2020
San Francisco's apartment market goes in reverse and WATG designs a solution for isolating without sacrificing social connectivity.
Market Data | Jun 23, 2020
National survey reveals pandemic's impact on college students' mental health, remote learning, families' income and more
Of 2,500 student respondents, 75% feel more anxious or stressed, 57% said they lost their summer jobs and 90% want to return to campus in the fall.
Market Data | Jun 23, 2020
7 must reads for the AEC industry today: June 23, 2020
Gyms are going bacnkrupt and leaving gaps in shopping centers and how hotels are trying to keep guests and employees safe.
Market Data | Jun 22, 2020
New House infrastructure package will provide needed investments in aging infrastructure, support economic recovery, and create jobs
The Moving Forward Act’s proposed $1.5 trillion in new investments will improve range of public infrastructure, creating needed demand for construction while making the economy more efficient.