Commercial real estate professionals always seek to determine where markets stand now and what to expect for the future. That future is particularly uncertain today as we see the continued impacts of the COVID-19 pandemic.
JLL Chief Economist Ryan Severino shared his economic analysis in a keynote address at NAIOP’s I.CON West this week in Long Beach, California. In his role at JLL, Severino is responsible for global and regional economic research, analysis and forecasting, as well as property market forecasting. He presented four perspectives on the economy ranging from the short-term to the industrial-specific.
Short-run Perspective: weathering a once-in-a-lifetime event
Severino’s forecast shows supernormal growth, well ahead of potential, with 2021 expected to generate growth not seen since 2000 when GDP growth was 4.1%, or potentially as far back as 1984 when it was 7.2%, or 1951 when it was 8.0%.
“It’s remarkable for me to even be standing here and putting up numbers like that,” Severino said. While these numbers might have seemed outlandish just a few years ago, “In the context of where we are today, these numbers feel pretty realistic.”
Severino called the contributing factors to this growth a “perfect storm” recovery due to:
- Dovish monetary policy: The Federal Reserve has cut interest rates and there is strong access to capital. Interest rates are still incredibly low.
- Strong fiscal stimulus: The fiscal policy boost is much larger and faster than past downturns. From 2019 to 2020, we had +9.5% government spending/GDP ratio.
- Pro-cyclical forces: This points to the idea that as the economy starts to get its legs under it, and we spend more money, we start to feel better about things.
- Reopening: This factor is unique to this recovery as businesses closed and then reopened. Usually there are shorter, shallower recessions or longer, deeper recessions. The coronavirus recession has not followed that pattern. “This is the shortest recession on record,” Severino said. “It only lasted two months, yet it generated the lowest unemployment rate since we have kept technical records [which were not kept during the Great Depression].”
- Dry powder: Pent-up demand with consumers eager to resume some semblance of normal life by visiting restaurants, bars and traveling.
Medium-run perspective: Pushing productivity
Fundamentally, Severino said, economics is about turning inputs (such as labor, capital or natural resources) into outputs (like automobiles and smartphones). Do declining productivity growth and investment indicate that the Solow Paradox has returned? The Solow Paradox, he explained, refers to the slowdown in productivity growth in the U.S. in the 1970s and 1980s despite rapid development in the field of information technology over the same period. As economist Robert Solow in 1987 quipped, “You can see the computer age everywhere but in the productivity statistics.”
Severino noted differences between the resolutions to the slowdowns in productivity of the 1990s, including improvements in CPUs and supply chain enhancement, and what is happening now in the 2020s. “I hear a lot of echoes of what happened in the ‘90s,” he said, “but it’s not the same as what I’m seeing today.”
Among the resolutions to slowdowns in productivity taking place now are use of AI and automation, but automation goals now extend beyond growing earnings, Severino said. Data from Bain and JLL revealed that prior to the COVID-19 pandemic, most organizations indicated that lower costs were the most important automation goal for their organization. Now, what matters most to companies is improved business continuity and business resilience.
Long-run perspective: Confronting structural change
Severino pointed to the accelerating baby boomer retirement as a major demographic structural change in the economy and the workforce. Many more baby boomers retired over the past year compared to the trend of the previous several years, with not enough people available to take their places in the workforce.
We are going to need automation and robots to help us be more productive, rather than them taking people’s jobs, he said. “There is no quick panacea to fix this demographic issue. It will be with us for a while.”
Industrial perspective: All systems go
“I do think the industrial market is set for another strong expansion,” Severino said. “It’s hard to see this momentum going away.” Limited supply could be the biggest concern.
Vacancy continues to fall with net absorption remaining near historic highs; vacancy fell below 5% this quarter. The pressure to make decisions and secure leases has contributed to rents hitting record highs of $6.62 per square foot average asking rent, Severino said. JLL expects industrial rents to grow between 5-8% as more new industrial space is delivered and quickly leased, he said. In addition, online shopping has contributed to the rise in 3PL and logistics and distribution demand.
“This property type has not only weathered this downturn but is racing out of the gate ahead of the other major property types, and really entrenching itself as the darling of commercial real estate,” Severino said.
The economy is moving faster than people think it is, Severino said. With predictions of somewhere near 7% GDP growth this year, “you don’t want to get caught flat-footed” by the economy, he said.
“If you’re not willing to make decisions yet, at least be thinking about it so you are ready,” Severino said. “I’m not saying you are going to miss the boat completely, but you might miss some of the best seats on the boat.”