August 21, 2017

A ‘Goldilocks’ economy, one that is not too hot or too cold, presents a favourable environment for real estate because it prevents the accumulation of expansion-ending imbalances such as excessive debt and inflation, says JLL Chief Economist Ryan Severino.

“It extends the economic cycle, supports real estate fundamentals, and maintains investor interest in the asset class,” he explains. “Real estate returns have fared well during the last eight years. Growth has been robust enough to generate improvement in real estate fundamentals, enticing investors, without running too hot,” he adds.

Severino’s comments come as the U.S economy entered its ninth year of expansion, the third-longest in history. Data from the U.S. Bureau of Economic Analytics (BEA) showed that real gross domestic product (GDP) increased by 2.6 percent in the second quarter of 2017. The BEA attributes the second-quarter climb to increases in both consumer spending on goods and services as well as gains in business investment, exports, and federal government spending.

However, this rate fell within, but at the low end, of JLL’s estimated range. U.S. economic data has also presented a mixed picture so far with wage growth continuing to be tepid, restraining spending and inflation.

Going forward, Severino expects the economy to continue its current trajectory for the rest of this year, with a growth rate of around two percent.

“The potential for somewhat stronger growth in 2018 remains, but only if policy changes occur. Quarterly growth spurts remain possible, but are harder to achieve as the expansion ages,” says Severino. “The economy has not grown by three percent or greater during a calendar since 2005, although it came close in 2015,” he notes.

However, Severino added that the overall outlook for real estate remains favourable despite potential short-term fluctuations in growth or interest rates. This “Goldilocks’ economy” with relatively low interest rates and inflation provides a conducive environment for real estate, as evidenced by steady increases in rental values, even as vacancy rises, he says.

According to JLL’s data, asking rents for new office product in the second-quarter of this year climbed 3.2 percent over the year and 4.9 percent for CBD Class A space. These gains were despite 11.7 million square feet of new deliveries, which pushed vacancy up 14.8 percent.

“The market remains relatively tight, and new construction supports rent growth. The biggest challenge remains a lack of labour to fill jobs, which has limited net absorption,” says Severino.

In the industrial sector, rents are also staying high with vacancies at or near all-time low levels because of strong demand, fuelled largely by e-commerce growth. “The biggest challenge remains supply growth, which has increased as the market tightened,” says Severino. Based on JLL’s H1 U.S. Industrial Investment Outlook, 88 percent of the markets tracked expect 2017 to continue to be favourable to landlords.

With regards to residential properties, strong demographics have boosted apartment rents and kept vacancy rates at low levels. Employment for people between the ages of 20 and 34 is growing at a rate twice that of all other age cohorts. “These ongoing job gains for younger workers should continue to support household formation, the key driver of apartment demand, by enabling younger workers to move out of their parents’ homes (the number of children living with parents continues to hit record-high levels) or out of shared apartments,” says Severino.

Among the sectors, retail faces shifting economic sands. “E-commerce has syphoned demand away from some retail centres, while the sector continues to deal with the construction hangover from the last cycle,” says Severino.

As the economy continues to present mixed signals, bets are on whether the U.S. Federal Reserve will raise rates for the third time this year, a move that will likely dampen real estate market sentiment. “While we believe that the labour market now likely hovers near this full employment rate, we will not know for sure until we pass this number and wage growth starts to spike,” says Severino.

“If the labour market continues along its current trajectory, the Fed will indeed begin shrinking its balance sheet by selling assets this autumn,” he adds.

Following its two-day policy meeting, the Federal Open Market Committee released a statement last month indicating that it might begin winding down a US$4.5 trillion stimulus program it embarked on to rescue the economy from the 2008 financial crisis as soon as September.

Click here to read more about real estate investment in the United States


Ryan Severino

Chief Economist, JLL

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