Trend of Low Unemployment and Inflation with Sluggish Growth Expected to Continue

President Trump has promised to return U.S. economic growth to above 3 percent in 2017, but that number might be hard to reach, at least in the near term. After an initial report of 2.6 growth percent in the second quarter, the number was revised to 3.0 percent, but the average for the first six months is 2.1 percent. Before Hurricanes Harvey and Irma hit, economists were predicting about 3 percent growth in the third quarter, but that number is now expected to be lower.

Although the president has ambitious goals for jumpstarting the economy, so far he has been unable to get any major legislation passed by Congress – including “repeal and replace” of Obamacare, tax reform (with tax cuts) and increase infrastructure spending. The need for reconstruction after the hurricanes are expected to help pick up growth in the next few months. In the long term, the retirement of baby boomers will most likely hinder economic growth, barring any sort of revolutionary technological advances that increase worker productivity.

Amid these trends, the Federal Reserve is expected to continue to increase short-term interest rates both this year and next, even though the Consumer Price Index (CPI) rose just 0.4 percent in August and has stayed below the Fed’s target inflation rate of 2.0 percent. The Federal Reserve also plans to begin decreasing its balance sheets later this year.

As short-term interest rates increase, the 10-year note is expected to move in kind. Situs RERC forecasts the 10-year Treasury to reach about 2.5 percent by the end of 2017 and approximately 3.0 percent by the end of 2018.

Rising interest rates are a mixed bag for CRE. They make borrowing more expensive, which hurts CRE investment. They also make investing in Treasurys relatively more attractive. However, higher rates indicate a stronger economy, which helps all property types in the CRE market. In addition, there may be an uptick in refinancing in the near term as long-term interest rates remain historically low and property owners decide to lock in rates before they get higher.

Unemployment is ultimately one of the most closely tied metrics to CRE fundamentals, and the national rate was 4.4 percent in August. It is important to remember, however, that unemployment is a lagging indicator and its impact on CRE and can take up to 18 months to come to fruition.

Based on its research, Situs RERC expects employment to remain strong in 2018 and wage growth to remain positive but weak. Labor shortages caused by retiring baby boomers may lead to shortages of skilled labor and upward pressure on wages. Job growth will be most prevalent in technology, health care, social assistance and elder home care.

As unemployment decreases, companies increase their needs for office space, which will lower vacancy and availability rates. People with new jobs may move to larger apartments or homes.

There will be new demand for tech-enabled office spaces, data centers, medical facilities, senior housing and retail that meets millennial preferences for self-care facilities (spas, yoga studios, gyms, etc.). More jobs in in distribution centers will probably be required as e-commerce keeps gaining popularity, resulting in a need for additional industrial warehouse space.

In conclusion, the U.S. economy keeps growing, but not at as fast a rate as many would like. The good news is that despite the somewhat sluggish performance, the nation’s unemployment and inflation rates remain historically low.