Research

Friday Market Insight

Good News Friday

 

 

 

This e-blast, originally called Good News Friday, began almost 10 years ago in the teeth of the Great Recession. The spin was always positive, highlighting economic and real estate indicators that pointed toward recovery. After a few years, as the economy and commercial property markets recovered, Newmark changed the name to Friday Market Insight, and the perpetually optimistic spin was replaced by a more balanced analysis.

For my last issue as the author, allow me to indulge my optimism by recounting all that is right with the economy and why this expansion cycle—the third longest since records began in 1857—could last until June 2019, when it will celebrate its 10th birthday and become the longest in history.

  • Consumers are in the game thanks to rising home prices and equity markets, plentiful job opportunities, available credit and strong confidence levels. Consumer spending accounts for 68% of total output (GDP) since 2010. If consumers feel good, businesses will follow.
  • Businesses are doing just that. After a recent slump in capital spending and corporate earnings, both metrics surged in the first quarter, up by 11.4% annualized (Bureau of Economic Analysis) and by 13.9% year-over-year for S&P 500 companies (FactSet). Businesses account for 13% of GDP. If businesses are making money and investing in equipment, structures and intellectual property, they are also hiring.
  • Employers added 138,000 net new jobs in May, according to today’s report from the Bureau of Labor Statistics, and the unemployment rate fell another notch to 4.3%. Employers have added a monthly average of 162,000 new jobs so far this year, below last year’s average of 187,000 but above the number needed to absorb new entrants into the labor force, which the Federal Reserve Bank of San Francisco says is between 50,000 and 110,000. As the labor market tightens, the pace of job creation will gradually recede to that range.
  • With talent harder to source, employers have raised wages, but not quickly enough to ignite inflation. Wages rose by 0.2% in May and are up by 2.5% over the past 12 months, still below the 3.0%-plus range that prevailed before the recession.
  • The Fed’s favorite inflation gauge, the core PCE deflator (personal consumption expenditures), which excludes food and energy, rose just 1.5% over the 12 months ending in April, still below the central bank’s informal target of 2.0%. The more widely reported core CPI (consumer price index) hit 2.3% in January, although it receded to 1.9% in April.

These indicators suggest the economy is getting a second wind late in the expansion cycle, even without the tax cuts and infrastructure spending pushed by the Trump administration. These proposals may not become law this year, but, paradoxically, that could be good for the economy, which is doing fine without them. The gradual pace of underlying GDP growth—still in the low 2% range—has helped the economy by keeping inflation, the primary killer of economic expansions, at bay. Big tax cuts and spending programs this late in the expansion cycle, with unemployment already low, could hasten the onset of inflation—better to wait until the next recession, when the economy needs stimulus.

The gradual pace of economic growth, along with restrained construction activity, has been good to commercial real estate. Although entity and portfolio transactions have slowed, demand for individual assets remains strong, as both institutional and non-institutional investors continue to seek out high quality, income-producing properties. On the leasing side, vacancy rates remain low—just past their nadirs for apartments and office properties, while still falling slowly in the industrial and retail markets. Rental rates continue to rise. There are pockets of overbuilding, which is common this late in a cycle, but they are isolated and should dissipate as the economy moves ahead.

Stock prices are high and could correct, but a correction would not necessarily presage a recession. Analysts like to joke that the stock market has predicted nine of the last five recessions, but joking aside, that ratio is about right.

One last point as I begin my “unpaid sabbatical of indeterminate length” (the “R” word): Artificial intelligence, robots, the Internet of Things and other advances in technology and biotechnology will disrupt many industries, including commercial real estate. However, in the process, they will make life better by improving productivity and, by extension, the quality of life for Americans and all global citizens. CRE is more than resilient enough to roll with the punches.

All the best to my colleagues, clients and everyone who follows NKF research. Click here to view all of the company’s research offerings, including its latest white paper on the financial services industry.


 
Robert Bach Director of Research - Americas  

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