C&W: ‘Excellent’ Macroeconomic Backdrop for CRE

The economic environment that affects commercial real estate property markets is in excellent shape by most measures, reported Cushman & Wakefield, New York.

“It is hard to imagine how the economic picture could be rosier than it is right now,” Cushman Chief Economist Kevin Thorpe said in the firm’s U.S. Macro Forecast report. “Real GDP has registered growth rates not seen since 2014 and the economy is creating jobs at a pace it has rarely done.”

Inflation-adjusted GDP growth, which averaged nearly two percent per year for most of the last nine years, exceeded four percent in the second quarter, “and the momentum will continue through this year and well into next,” Thorpe said.

Wells Fargo Economics, Charlotte, N.C., predicted real GDP growth will equal 3.1 percent this quarter. “We expect federal spending to provide a strong boost to growth,” the firm’s Monthly Macro Manual said. “Our forecast for 2019 economic growth largely remains unchanged. We still expect stronger growth in first-half 2019 to give way to a gradual softening starting in the second half of the year.”

The Cushman report found no shortage of fundraising for commercial real estate; dry powder aimed at North American commercial real estate hit a cyclical high $186 billion in August. But the report predicted CRE sales, pricing and returns will moderate as the investment cycle matures.

Cushman noted the commercial real estate investment landscape is becoming more nuanced as the cycle ages. “The temptation is to say that if interest rates rise then cap rates will rise, implying that values must fall,” the report said. “Although the higher cost of capital will put pressure on certain assets, the very fact that interest rates are rising signals that commercial real estate values should go up, not down.”

Rising interest rates mean the economy is getting stronger, Cushman said. “That means that all of the factors that drive net operating income–those that lower vacancy, put pressure on rents and induce greater appetite for risk and debt–will support commerciral real estate values even in a rising interest rate environment. It is also worth noting that nationally, commercial real estate values have never fallen outside of a recession. So if GDP is growing, so too are commercial real estate values.”