Slow growth but no recession.
CHICAGO-Gazing into its collective crystal ball, members of the research team at Jones Lang LaSalle‘s 2013 outlook media briefing, which took place Nov. 13, offered a good-news, bad-news scenario. The bad news is that uncertainty still exists even though the presidential election is over; and that uncertainty could put a damper on economic growth which would, in turn, impact commercial real estate growth and activity.
On the other side of the coin, the good news is that JLL managing director Ben Breslau isn’t predicting a recession during the next year. “We’ll see slow growth, but no recession,” he commented. The slow growth is – and will continue to – result from uncertainty. Though the question of who will run the country for the next four years has been answered (and along with it questions pertaining to the Patient Protection and Affordable Care Act and the Wall Street Reform and Consumer Protection Act, known as “Obamacare” and “Dodd-Frank” respectively), enough questions remain to cloud the immediate future.
Breslau, in his opening remarks, discussed issues such as the continued national debt, the pending fiscal cliff and euro crisis as potential growth-stoppers. “We could add two more to that; sustainability of growth in emerging markets and unprecedented monetary policy and liquidity,” he noted. “All of those mean quite a bit of uncertainty that is weighing on confidence levels.” He went on to say that, interestingly enough, while the Eurozone crisis had taken a back burner to the fiscal cliff, it’s actually the European situation that will have more impact, over the long haul, as a stop-gap measure will be put into place to prevent it from happening.
Even through the murk of uncertainty, there are some positives that could emerge in the next year or so. Breslau and colleague John Sikatis, director of office research, pointed out that, if the politicos in Washington can reach a consensus and start moving forward on certain issues, growth could accelerate beginning in late 2013. With better-capitalized banks, corporations with strong balance sheets and low interest rates and inflation, the pump is primed and ready for growth. All that’s needed is the right environment for that growth to occur.
The current uncertainty had hit leasing activity in the office markets – Sikatis pointed out that overall, U.S. office leasing activity dropped by 20% from 2011 and that, from a vacancy and absorption standpoint, things will remain the same in 2013. “We anticipate that if the government can act on some resolutions with fiscal policies and Europe tightens up its policy, we could see greater growth,” Sikatis commented. Furthermore, he noted, the office recovery market will be segmented, with the CBD and urban cores doing better than the suburban submarkets. Rent growth and tightening vacancies could also lead to spec growth in some urban locations.
Even with growing demand, Sikatis warned that tenants are seeking more efficient floorplates and are, in many cases, giving back space when renewing leases. “We’ll continue to see this over the next couple of years,” he remarked. “All of that will have an impact on demand, and developers need to pay attention to this.”
Other predictions from the briefing were as follows:
- Ecommerce is having an impact on distribution and logistics which will, in turn, have an impact on retail and industrial product.
- A combination of increasing costs and diversification mean production will come closer to home. Though this won’t lead to a boom in the U.S. manufacturing sector, it will have an impact on Mexico as well as increase demand for distribution centers in the south and Midwest.
- On the retail side, tenants are moving to smaller footprints, while traditional grocers are running up against the discounted stores on the one hand and upscale grocers on the other.
- Multifamily will continue in high demand from an investment point of view, though an eye needs to be kept on government initiatives to move people toward single-family housing and the possible specter of overbuilding something to keep an eye on.
- Hotel fundamentals will continue strong, with RevPAR growth to range between 4% and 6%.
- Capital markets will impact transaction volumes and provide more outlets to obtain debt and equity.