C&W: A Correction, Not a Recession

Despite January’s stock market jitters, the macro economy and U.S. commercial real estate should see positive economic results this year, said Cushman & Wakefield, New York.

Worries about China and oil prices caused stock markets around the world to stumble early this year, leaving the Dow Jones and S&P 500 both nearly nine percent lower at January’s close than on December 31. But C&W said the stock market is not a very good recession predictor and it predicted continued moderate growth for the U.S. economy.

“Economic turbulence at the start of a new year is nothing new,” said Cushman & Wakefield Chief Economist Kevin Thorpe. “We have seen it come and go for the past several years without any long-lasting damage to the health of the broader economy.”

Thorpe said this volatility typically drives capital back to United States with a refocus on core assets, “and that is happening again,” he said. “The key indicators to watch right now are consumer confidence and the labor markets. Those are both telling us that the core of the U.S. economy and the property markets are still in reasonably good shape.”

Cushman & Wakefield predicted the office sector will post net absorption in the 75 to 85 million square foot range annually over the next two years. Although demand may ease toward the end of that period, new development should continue to lag, the real estate services firm said. As a result, vacancy rates should decline from 14.2 percent in 2015 to 13 percent in 2017 and office rent growth should continue to accelerate, reaching 4.5 percent next year.

The industrial sector will likely face a mix of headwinds and tailwinds, but the overall outlook remains generally upbeat, C&W said. The headwinds come from domestic manufacturing slipping due to a stronger U.S. dollar and weaker global demand. “But these drags will be more than offset by a confident, higher spending consumer, which will boost demand for space related to ecommerce, auto, technology and housing along with other consumer-related sectors,” the forecast said.

Although C&W expects demand to cool off, it predicted that overall industrial vacancy will remain on par with the tightest conditions ever observed in the sector, falling to seven percent later this year.

In the retail sector, demand will likely remain focused on Class A product as well as new space, C&W predicted. Vacancy should decline to seven percent in 2016 and rental growth will likely average two percent to three percent between 2016 and 2017.

“At this tenuous time in the cycle, it is important to remember that the global central banks remain highly accommodative,” Thorpe said. “Whether it’s by keeping interest rates well below the normalized rate such as the U.S. or by moving forward with the additional capital injections occurring in many other countries, the bottom line is that they will continue to take extraordinary measures to prolong this business cycle. And more likely than not, those extraordinary measures will continue to create a highly robust–albeit highly uneven–real estate environment.”