“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 | May 30, 2018
Construction employment increases in 256 metro areas between April 2017 & 2018
Dallas-Plano-Irving and Midland, Texas experience largest year-over-year gains; St. Louis, Mo.-Ill. and Bloomington, Ill. have biggest annual declines in construction employment amid continuing demand.
Market Data | May 29, 2018
America’s fastest-growing cities: San Antonio, Phoenix lead population growth
San Antonio added 24,208 people between July 2016 and July 2017, according to U.S. Census Bureau data.
Market Data | May 25, 2018
Construction group uses mobile technology to make highway work zones safer
Mobile advertising campaign urges drivers who routinely pass through certain work zones to slow down and be alert as new data shows motorists are more likely to be injured than construction workers.
Market Data | May 23, 2018
Architecture firm billings strengthen in April
Firms report solid growth for seven straight months.
Market Data | May 22, 2018
Vacancies stable, rents rising, and pipeline receding, according to Transwestern’s 1Q US Office Market report
The Big Apple still leads the new construction charge.
Market Data | May 18, 2018
Construction employment rises in 38 states and D.C. from April 2017 to April 2018
California & West Virginia have biggest annual job gains, North Dakota has largest decline; California & Louisiana have largest monthly pickup, Indiana & North Dakota lead monthly drops.
High-rise Construction | May 18, 2018
The 100 tallest buildings ever conventionally demolished
The list comes from a recent CTBUH study.
Resiliency | May 17, 2018
Architects brief lawmakers and policy-makers on disaster recovery as hurricane season approaches
Urge senate passage of disaster recovery reform act; Relationship-building with local communities.
Market Data | May 17, 2018
These 25 cities have the highest urban infill development potential
The results stem from a COMMERCIALCafé study.
Market Data | May 10, 2018
Construction costs surge in April as new tariffs and other trade measures lead to significant increases in materials prices
Association officials warn that the new tariffs and resulting price spikes have the potential to undermine benefits of tax and regulatory reform, urge administration to reconsider.