Construction and design

Ripple Effect: How CRE Delivers Economic Benefits

As the U.S. economy chugs along, delivering slow but fairly steady growth, policymakers are focused on crucial issues, including interest rates, health care and tax policy.

The forecast for each of these issues in the year ahead remains unknown. The Federal Reserve plans to raise interest rates, Congress is considering changing health policy and tax reform may (or may not) be coming later this year. One positive factor that has remained reliable in recent years: the contribution that commercial real estate delivers to the American economy.

In his “Economic Impacts of Commercial Real Estate 2017” report, published in January, economist Stephen S. Fuller of George Mason University breaks down some of CRE’s key economic contributions. He found that new development in 2016 combined with the operation of existing buildings in that year generated direct expenditures of $310.1 billion. Fuller adds that this spending:

  • Contributed $861.0 billion to U.S. GDP.
  • Generated $264.4 billion in personal earnings.
  • Supported a total of 6.25 million jobs.

Building is good for the economy. “A key factor in the economy’s growth in 2016 was the continuing expansion of the construction sector, with construction spending increasing each year since 2011, gaining 48.7 percent between 2011 and October 2016,” Fuller writes. “For the year ending in October 2016, total construction spending was up 3.4 percent exceeding the GDP growth rate for this period.”

That spending also ripples out through the rest of the economy. That’s why Fuller assigns an output multiplier of 2.91 – generated by the Bureau of Economic Analysis – to note that every dollar of new construction spending (hard costs) “generated a total of $2.91 of value to the economy as the initial construction expenditures are re-spent throughout the economy.”

As they’re being conceptualize and designed, CRE buildings create opportunities for many high-skilled professionals, including architects, engineers, attorneys, marketing and management professionals.

When those buildings are finished, they will be operated and maintained. “Based on the existing stock of commercial buildings, totaling 45.8 billion square feet in 2016, direct expenditures for building operations totaled $150.1 billion and contributed $396.0 billion to GDP,” Fuller notes. “These direct expenditures also generated $113.9 billion in personal earnings (wages and salaries) and supported a total of 2.944 million jobs.”

And, of course, they’ll be filled with workers. Whether that means factory workers, fulfillment center employees or professionals, those employees generate economic growth every day with their labor as well as their purchases. Fuller concludes that “the 410.1 million square feet of new office, industrial, warehouse and retail building space constructed in 2016 have the capacity to house 1.073 million new workers with a total estimated annual payroll of $57.6 billion.”

NAIOP’s latest industrial space demand forecast indicates quarterly net absorption of commercial space in 2017 to average about 64 million square feet, about what was seen last year. The model, run quarterly by Dr. Hany Guirguis of Manhattan College and Dr. Joshua Harris of the University of Central Florida, looks at variables throughout the entire supply chain and is ahead of the demand for space, so it’s able to capture the majority of changes in demand. It “suggests that net absorption could slow to 57 million square feet per quarter in 2018 due to variation in model variables that measure GDP and unemployment. However, given uncertainty regarding federal policies and their effects on the overall economy, this figure could be revised substantially based on unforeseen events.”

The authors also write that, “The consumer sector of the economy appears to be very healthy,” and note that proposed policies might lead to faster economic growth. The model also “indicates that areas involving consumer products and e-commerce distribution are likely to remain the largest generators of demand for industrial space in 2017.”

Guirguis and Harris warn that we must, “as always, expect the unexpected.” But it’s also safe to expect big economic contributions in the year ahead from CRE.

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