The booming U.S. economy has still has a lot of room to grow.
That was the message from speakers at the “Views on Economic Indicators” session at CRE.Converge 2018.
Calvin Schnure, senior vice president of research and economic analysis for Nareit, and Ryan Sweet, director of real-time economics for Moody’s Analytics, agreed that the U.S. economy is mid-cycle and is not currently showing traditional indicators of an impending downturn.
The most common harbinger of a downturn is an economy that is overbuilt (through excessive investment, spending or physical expansion), overheated or over-leveraged, Schnure said. “I don’t see any of those on a national basis… We have a long time to run with this economy.”
Schnure and Sweet pointed to a range of indicators that reflect a healthy and sustainable economy. Record low unemployment is projected to drop further to the low three percent range in 2019, while most industries (with the exception of retail) continue to post significant job growth and moderate wage increases, Sweet said. Meanwhile, inflation is expected to remain in the traditionally healthy range of three percent.
Corporate profit rates are currently high, Schnure said, which means that companies have the financial headroom to continue expanding and to meet anticipated demand for higher wages in the near future.
Some sectors are even exceeding expectations. Manufacturing, for example, has been recovering at better than expected rates and, at present, is not showing signs of being impeded by trade tensions, Sweet said.
Those economic realities and projections are creating favorable conditions in most real estate sectors.
Demand for industrial spaces – especially for distribution centers – is very strong currently.
“Seventy percent of the growth in industrial demand is for logistics facilities,” Schnure said. “Demand had been far outstripping supply until about a year and a half to two years ago.”
Since then, the sector “has been roughly balanced with a very low vacancy rate and rent growth of six percent or so. That’s still a very hot market,” he said.
“The biggest thing to keep in mind with industrial logistics is the available open space near population centers and transportation hubs got used up about two years ago,” he added. “In economist terms, what this means is a supply bottleneck has come along… This market is going to see continued growth of demand for industrial space and they will have to search harder to find that space. The owner of an existing industrial logistics facility is in a really good position in this market.”
Demand for new housing, especially multifamily housing, is also very strong. Following the subprime market crisis, new housing construction dropped to one-quarter to one-third of the level which is generally required to support the population, Schnure said. He estimates that pent-up demand for new homes of all types now amounts to 3 million to 4 million homes and it will take the development and construction industries several years to build that housing stock. Demand for affordable housing, especially affordable apartments, is especially high, he said, adding that a 4-5 percent increase in average wages could significantly ease the affordable housing issue.
In the midst of robust economic growth, net absorption of office space remains unexpectedly soft, Sweet said. The popularity of coworking spaces and telecommuting may be contributing to that situation.
Demand for retail space remains soft and the country currently has an oversupply of senior housing and self-storage facilities following a surge in construction in those sectors.
Linda Strowbridge is a freelance business writer based in Baltimore, MD. A long-time journalist in Canada and the U.S., Linda now writes extensively about the built environment, economic development, green business and the insights of business leaders.