Economic Checkup: CRE Experts Foresee Cautious Optimism And Reduced Deal Flow Ahead
The economy has been on a roller coaster ride since President Donald Trump took office in January, and the commercial real estate industry has responded with cautious optimism throughout the ride.
Confidence in Trump's plans to institute business-friendly policies was at the forefront of most industry players' minds at the beginning of the year, but as Q1 has come and gone with little progress made in the way of tax cuts, infrastructure spending and financial deregulation, that confidence has been replaced with trepidation regarding trade and immigration policies.
Bisnow discussed these factors with CRE economists and experts to get a better feel for the state of the economy and how the commercial property industry has and will continue to respond to major economic shifts — from the Federal Reserve's interest rate hikes, to the ups and downs of the labor market and last quarter's disappointing economic expansion.
Joseph Derhake, Partner Engineering & Science CEO
What is your take on the state of the economy?
Despite [a weak March jobs report and slow gross domestic product expansion], Partner actually had a very strong first quarter driven by a lot of CRE transaction and financing activity. There continues to be a lot of maturing CMBS debt, and a lot of refinancing was accomplished in the last four months. I’m expecting that segment of the CRE market to remain strong throughout 2017, but that it will drop off significantly in 2018.
What about CRE impact, especially in response to Trump's policies (commercial valuations, deal flow, transaction volume, etc.)?
We are seeing a lot of caution in the retail market where a landlord’s lease would be penalized by rising rates. Combined with the societal changes that retail is experiencing, it means that this has become a tricky space for investors.
Dodd-Frank regulation has constrained construction lending in recent years. This constraint has especially affected the office space, retail and industrial markets, but multifamily has not felt the same burden. To some extent, these Dodd-Frank regulations are one of the reasons that there has been overbuilding in multifamily, and under-building in the other sectors. Any sort of rollback of the regulation could potentially undo this effect.
Jack Kern, Yardi Director Of Research And Publications
What is your take on the state of the economy?
The U.S. economy is basically sound and the fundamentals for our industrial and services industries are signaling some level of growth moving towards year-end. The premise of a lot of economists that are suggesting “let’s get ready to tumble” are based on looking at the global insecurities and poor performance of our trading partners. I do not share that belief. GDP will likely show better growth in the next quarterly release.
How will this impact the Fed's plans to boost rates another two to three times this year? (Many predict a move in June is possible.)
The general slowdown in some industries hasn’t deterred the Fed from feeling that another rate increase is justified at the next [Federal Open Market Committee] meeting. These minor increases are not having a major impact at this point because the rates are so low. Those interest rate-sensitive sectors — home sales, for example — are still showing strength and will continue to do so. Business borrowing isn’t an issue either right now. I anticipate at least one more increase but not more than two for the year based on the numbers right now.
What about CRE impact, especially in response to Trump's policies (commercial valuations, deal flow, transaction volume, etc.)?
Interest rate increases tickle the itchy finger of property trades and each increase not only affects the viability of what are marginal deals but it also affects shifts in energy production where debt is a key component of oil and gas exploration. Another increase is the beginning of the redefinition of what makes a transaction work because debt increases take away productivity and efficiency gains. The commercial real estate industry is still very strong, albeit at the point of having fewer transactions. That is the trend I am expecting to continue for a while.
Victor Calanog, Reis Inc. Chief Economist
What is your take on the state of the economy?
For a variety of reasons, first-quarter GDP growth numbers tend to be muted — only for growth to pick up in the later part of the year (that has been the pattern since 2014).
This gives ammunition to optimists who say “wait and see” — and they point to the ebullience of financial market indicators. We haven’t seen much by way of positive lift that has affected CRE and multifamily fundamentals; if anything, apartment and retail fundamentals appear to be weakening.
What about CRE impact, especially in response to Trump's policies (commercial valuations, deal flow, transaction volume, etc.)?
It is all still very “wait and see” at this point, but there’s still a crying need for clear, definitive guidelines for any kind of change the current administration plans to execute. Market participants are waiting for that kind of leadership so that they can move forward with expansion plans, if any.
Bob Bach, NGKF Director Of Reseach — Americas
What is your take on the state of the economy?
The economy is perking along at the same modest pace it has been since the recession. It’s not about to accelerate due to enthusiasm for Trump’s policies or decelerate, despite the recent weak readings on first-quarter GDP and March employment. First-quarter GDP of 0.7% was restrained by companies working down excess inventories, likely setting up a production rebound that will show up in second-quarter GDP. Consumer spending was weak as well, notably for vehicles, but the underlying supports for a spending rebound are in place, i.e. low unemployment and rising prices for homes and stocks. Business are boosting spending on equipment, structures and intellectual property, which is a good sign.
The weak March employment report — only 98,000 net new jobs created — was affected by retail sales moving online (fewer retail clerks in stores) and the warm early spring, which also likely weighed on GDP.
Business and consumer confidence remain high despite Trump’s early stumbles. Tax cuts for businesses and households are likely to be enacted later this year but will not come anywhere close to paying for themselves, thus adding to the deficits for years to come. Nevertheless, they will stimulate growth over the next few years, with the current expansion lasting at least two more years, which will make it the longest in history.
What about CRE impact, especially in response to Trump's policies (commercial valuations, deal flow, transaction volume, etc.)?
The peak years for commercial real estate in this cycle are behind us. Sales and leasing activity will continue at a moderate pace but below the records set in recent years. Industrial is an exception as the migration of sales online is boosting demand for distribution and fulfillment centers at the expense of retail space, which is being vacated by department and clothing stores and other downsizing retailers. Although the peak years are likely behind us, property sales and leasing demand will move forward at a sustainable pace for a couple more years at least thanks to steady, if unspectacular, economic growth.
Raymond Torto, Harvard Graduate School Of Design Lecturer
What is your take on the state of the economy?
The economy is strong. The issue for 2017 will be a continued shortage of quality labor.
How will this impact the Fed's plans to boost rates another two to three times this year? (Many predict a move in June is possible.)
The Fed remains cautious under Yellen, and will probably punt this round. Wait and see ... I think they should move and get ahead of the market.
What about CRE impact, especially in response to Trump's policies (commercial valuations, deal flow, transaction volume, etc.?
Trump's policies and accomplishments are idiosyncratic, so valuations deal flow, etc., will oscillate from strong (the stay calm and carry on folks) to the worried class, which will proceed cautiously.
