ALEXANDRIA, VA—Fresh reports, such as Tuesday’s announcements that orders for durable goods rose last month and the Conference Board’s consumer confidence index is up, continue to point toward a gradual recovery in the US economy. But two leading commercial real estate researchers separately have posed the question of when—or if—that recovery will shift into higher gear. The answers, both conclude, aren’t clear at this point.
“Although the economy continues to move forward, it is doing so at a measured pace, which has encouraged businesses and consumers to alter spending patterns and adjust to limited growth,” writes Alexander Paul, EVP with Alexandria, VA-based Delta Associates. He characterizes this growth as “weak for a post-recession recovery,” albeit one that is likely to continue on a steady track through 2017, “barring a catastrophic event.”
At Cushman & Wakefield in New York City, Ken McCarthy, senior managing director, economic analysis and forecasting, writes in his weekly report that “The jury is still out on whether the economy is entering a period of stronger growth that will last through the next year or two, or just rebounding from the abysmal winter of 2013/2014. A slew of data for the month of April has been released and it showed a mixed picture, with the housing sector rising strongly while retail sales were sluggish and industrial production fell.”
Even the sentiment indicators have been mixed, McCarthy writes, “with small business confidence up while consumer sentiment fell,” although the Conference Board on Tuesday said that consumer confidence rose to an index of 83 in May from 81.7 in May. “Our view remains positive on the outlook for the economy over the balance of this year and into 2015, but the key to the coming year will be how the economy performs during the next few months.”
McCarthy notes both positive and negative signs in that slew of April data. On the positive side, for example, new housing starts rebounded strongly, while retail sales showed a modest uptick from the previous month. More negative, however, was April’s 0.6% decline in industrial production.
Paul: says that Delta Associates expects that job growth will remain muted compared to previous expansion cycles, but adds that it will proceed on “a slow and steady trend. On balance, we forecast that payroll job growth in ‘14 will be slightly better than in ‘13, with approximately 2.4 million jobs created this year compared to the 2.3 million created last year.”
This outlook has broad implications for both owners and tenants. For multifamily owners, writes Paul, there’s a need to “carefully tailor marketing programs based on the fit of each property for certain wage segments.” Developers in the office sector, in the meantime, are advised to “assemble sites for the peak delivery period, which varies by market but on balance is likely to be in 2016-2017,” as job growth reaches the peak of its cycle.
Office tenants continue to have the upper hand in many markets “due to modest demand and the effects of densification,” or the amount of square footage leased per worker, according to Paul. “However, on balance, tenants’ leverage is gradually eroding as economic growth accelerates. The process is likely to take longer than in prior cycles,” meaning that tenants may continue to have leverage for the next two to three years, “but office rents are likely to edge higher in many markets over the next few years.”