Real Estate Forecast: Politics, the Economy and Capital
Leading NAIOP’s business development efforts allows me the privilege of visiting chapters to engage new partners and hear what’s happening in their regions. Earlier this month, I had the opportunity to attend NAIOP Chicago’s annual Real Estate Forecast, along with 250 leaders in Chicago’s booming CRE market.
Since NAIOP is bringing its fall CRE.Converge conference to Chicago this year (mark the date now and plan to be there: October 10-12), I enjoyed learning about how Chicagoans feel about the state of the market. Heard among the crowd…
- [Regarding Chicago’s industrial market] “This was the first time I didn’t hear ‘let’s wait until after the election’ to move forward on a deal.” Brian Gedvilas, Value Industrial Partners
- An intriguing new trend in Chicago suburban retail: swim schools are taking space in suburban shopping centers. Jordana Parker, Osman Construction Corporation, says swim schools are requiring that pools be added as a part of the build out. Landlords are happy to fully lease the space, but it begs the question of what to do when the lease expires and the swim school tenant doesn’t renew.
The keynote, Dr. Mark Eppli, Robert B. Bell, Sr., Chair in Real Estate and Professor of Finance, Marquette University, hit a homerun with his forward-looking remarks. Among his most notable observations (hat tip to Matt Baron, NAIOP Chicago staff writer, for compiling these notes):
“All along I saw Trump being the next President of the United States.” [A few moments later, he added…] “The Cubs winning the World Series? I said that last year, I do recall.”
“The market participants are not perceiving greater risk on a net basis from a Trump presidency. One of the things that has clearly happened since the election is financial stocks have really done quite well.” Eppli noted that in the two months since the election, bank stocks appreciated about three times the S&P 500, which itself is up a robust 6.8 percent.
“The net effect of this has been bullish, largely around regulatory and tax benefits, so we’re going to have greater earnings by corporations because of lower taxes and maybe be more productive because they don’t have as big of a regulatory burden, especially in the financial services industry.” Over the next two years, Eppli said he does not foresee a step back in the economy.
Despite the overall positive economic indicators in the U.S., “it will be next to impossible for Donald Trump to meet his (promised) 4 to 5 to 6 percent GDP growth rate.” To put it in context – GDP grew an average of 3 percent annually after World War Two. Since the Great Recession it has grown about 2 percent.
GDP growth is driven primarily by two things: higher worker productivity and a growing workforce. Worker productivity has been essentially flat since 2009. It has grown only about 1 percent in that time. With a workforce projected to grow by a mere 0.2 percent annually through 2025 and only growing marginally more productive, the U.S. will be hard-pressed to achieve as much as a 2 or 2.5 percent annual growth in the GDP.
As to whether the current economic expansion is sustainable, Eppli stated that he doesn’t buy the “every eight year recession model.” While the current recovery’s length is the third-longest of the past century, its rate of growth (2.1 percent) is about half of the previous expansionary period of 1991 to 2007.
Excessive credit, or as Eppli put it, “an overly frothy debt market,” is something that could bring the expansion to an end. Total credit markets doubled from $13 trillion in 2000 to $26 trillion in 2008 — and right into the Great Recession.
In an effort to “get you to think about what (metrics) you’re using to buy real estate,” Eppli provided extensive insight on the importance of determining which metrics were helpful — and which are given too much credence — to gauge where the market may be headed. He singled out the Cap Rate-to-10-Year U.S. Treasuries spread as “a misguided or an altogether wrong metric.”
Investment capital has to look at commercial real estate to get the 7.5 percent rate of return that they target. Conversely, bank credit has gotten tighter since the last quarter of 2015, and Eppli expects that will continue “because of the regulatory environment…some of the bank leadership, not necessarily the real estate [leadership], might think they are over-allocated to real estate.”
Chris Ware is Vice President, Business Development at NAIOP.