Transwestern: CRE Should Benefit from ‘Slow, Steady’ Economic Growth

The U.S. economy continues to show slow, steady progress despite fears of a global economic downturn and some domestic headwinds–and this progress should benefit commercial real estate, reported Transwestern, Houston.

Transwestern Chief Investment Officer Tom McNearney examined how the global economy affects commercial real estate. He noted that negative factors such as declining corporate profits, business investment and net exports from a rising dollar have been offset by consistent job gains, wage growth and “resilient” consumer spending.

“Additionally, aggressive global stimulus plans appear to be having the desired effect,” McNearney said, noting that negative-yielding debt worldwide recently reached $17 trillion and Eurozone first-quarter gross domestic product growth came in at 2.2 percent, which beat the U.S. growth rate for the first time in several years.

“While some see an economy in its final innings, there is little evidence of the financial excess, weak credit, deteriorating underwriting and surging defaults that typically signal the end of an expansion,” McNearney said. He noted that banks maintain and actually strengthened underwriting standards “and have even backed away from higher-yielding, risky loans to energy companies and highly leveraged corporate buyouts.”

In addition, commercial mortgage-backed securities delinquencies continue to reflect underwriting discipline, McNearney noted. “This caution by lenders is likely to prolong the cycle, not expedite a recession,” he said. First-quarter CMBS issuance fell 25 percent year-over-year due to swap spread volatility and ongoing uncertainty about risk retention rules taking effect in December, he said.

Transwestern’s June The Briefing report noted a few slightly more troubling indicators for CRE. First-quarter property sales fell 20 percent year over year, reflecting last year’s larger than usual portfolio and entity-level activity. Single-asset sales fell 11 percent year over year. And FPL Consulting, Chicago, forecast some tapering of public pension fund commercial real estate investment to $40 billion in 2016.

But McNearney said the biggest threat to the U.S. economy and U.S. commercial real estate remains external events, “such as a meltdown in Japan, developing countries or the European Union,” rather than internal factors.