Commercial Real Estate: US economic expansion continues, but investors have become wary

In the current investment environment, the best offense is a good defense. It is true that we have entered the longest expansion period in U.S. history, but in commercial real estate (CRE), the “no-brainer,” aggressive approaches to investment no longer exist.

This is the main conclusion of research conducted so far this by year RERC, a SitusAMC company.

The economy continues to do reasonably well, as it has during much of the expansion, which began in July 2009. Gross domestic product (GDP) grew 2.1% in 2Q 2019, down from 3.1% (third estimate) in 1Q 2019, which was the best first quarter in four years. The equity markets also enjoyed one of their strongest quarters – the best start to a year since 2009. The Dow Jones Industrial Average rose past the 27,000 mark in July for the first time and looks like it will keep going up. Wall Street investors seem encouraged because the Federal Reserve Board is poised to lower rates this week. Lower interest rates are typically good for CRE investment as they make it easier for investors to borrow and make CRE more attractive compared to bonds, assuming that CRE returns stay stable.

In addition, President Trump and congressional leaders last week announced a budget deal that would prevent a government shutdown or the government from exceeding the debt ceiling and running out of money to pay its bills. The House passed the agreement last week, and the Senate is expected to follow suit this week.

But investors still remember that asset prices cannot continue upward forever. We are seeing that things are different this time around; investors are being cautious in their strategies and preparing for the inevitable downturn, which will lead to a more measured correction when it comes. Secular changes in the economy – steady, but slow economic growth, low unemployment combined with low inflation and wage growth, and exceptionally low global long-term interest rates – are the new normal.

During this expansion, we have seen unusual global monetary policy (think negative interest rates), substantial increases in global capital flows, and major technological and demographic shifts. The impact of technology cannot be understated, not just in our culture, but for CRE investment – and even the CRE industry itself. There have been vast technological changes in the retail appraisal process since 2009. These changes are expected to continue, with more automation creating faster, more detailed and more focused appraisals.

As we know, one of the main benefits of investing in CRE is that it is a tangible asset with an income component. This allows investors to take a defensive posture – picking the property types that have less volatile income streams and holding for the long term. It also allows investors to protect their downside and be prepared when the next recession comes.

That’s why we are seeing strong activity in industrial and apartments, as these sectors will provide a solid income component for investors. After all, the e-commerce trend is not going anywhere, and people will always need places to live, work and play. Structural changes in demographics will boost demand for senior housing, life science and medical facilities for the foreseeable future.

The cycle that seemed long in the tooth even three years ago is also facing some major global political challenges that could finally tip the scales toward recession. As protectionism ramps up on a global scale, the U.S. and China are continuing their trade negotiations without appearing close to an agreement. Chinese investment in the U.S. has fallen nearly 90% since Trump became president. Prices for imports and exports declined in June. The International Monetary Fund predicts global economic growth will remain sluggish. Harder to gauge for its effect on the U.S. economy is the ongoing uncertainty over the U.K.’s struggles to work out a plan to “Brexit” from the European Union. New Prime Minister Boris Johnson has vowed that the U.K. will leave the EU by Oct. 31, with or without a deal.

Visit our website or call 319-352-1500 for more information about RERC’s research.

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