Why the Economic Expansion Still Has Room to Grow

Don’t count this cycle out yet. The recent fiscal and monetary stimulus package may have given new tailwinds to the slow-and-steady growth trajectory that has marked this cycle, according to experts last week at the Burnham-Moores Center for Real Estate’s Breakfast at the BMC Lecture Series at the University of San Diego. Mitch Roschelle, partner and business development leader at PwC, was the featured speaker at the event.

“When you compare this expansion in the U.S. to previous ones, for most of the cycle, we’ve seen slower economic output and job growth on a relative basis,” Roschelle tells GlobeSt.com. “This has picked up somewhat due to the combination of both monetary and fiscal stimulus. The benefit of which has created—for now— tailwinds in our economy outweigh the headwinds, suggesting the expansion has more legs to it.”

Norm Miller, PhD and Hahn Chair of real estate finance at the University of San Diego School of Business, who is affiliated with the Burnham-Moores Center for Real Estate, agrees that we could be in for a extended economic cycle. “A longer economic cycle is possible today because of better regulations and monitoring of the economy, at least when they are working,” Miller tells GlobeSt.com. “We also get information much faster today and that allows businesses to pull back when they see an excess of some type, be it too much vacancy in a certain type of property, or too much inventory coming online.” Information and data collection is possible through both public and private sources, like CoStar, REIS, Moodys, RCA and so on, according to Miller. This data plays an integral role in better addressing supply-demand dynamics that can prevent overbuilding and enhance stability.

In terms of predicting the end of the cycle, Miller says that a lack of exuberance—the typical run-up period to a recession—could mean a longer cycle and a milder downturn. “We can expect less over building in 2019 in local markets than in prior cycles, but this does means astute investors need better analytical skills than before as you can’t count on huge dips in prices every several years,” he says. “The next price dip may be mild, but it may not happen until late 2020 or 2021 and it will require jumping in faster than before.”

Stock market volatility may also increase real estate allocations in the year ahead, as they have in past cycles. “When people get scared as they did of the techs in 1998, the dot.com bubble days, money flows to lower risk investments like real estate and this means higher allocations of capital to real estate and that drives yields down,” adds Miller. “This may slightly offset higher interest rates and compress cap rates even more, but I think our memories will be short and the allocations to real estate will be stable.”

Attendees at the Breakfast at the BMC Lecture Series were also optimistic about the year ahead. According to Roschelle, 80% of the survey respondents believe that the prospects for profitability for the real estate industry are good-to-excellent for the year ahead. That data was based on a survey conducted in the fall 2018. Miller says that survey reflects general market sentiment as well. “Most people understand from the jobs reports that we are doing well now, and we have been doing well for many months,” he says. Additionally, the GDP growth line has been a straight line for the last 10 years. For me, the big fear is trade wars and other countries that no longer want to own our debt.”

In 2019, both Roschelle and Miller agree that there are big opportunities in the multifamily and industrial sectors. Miller gets more specific, listing data centers and short-distance regional warehouse space that serves the ecommerce market as the best opportunities in industrial, while co-living communities that can offer quality amenities at market rents are the best opportunities in multifamily. Geographically, he is most bullish on regional investment in higher cap-rate markets, including Pittsburgh, Columbus, Cincinnati and Indianapolis. “Good airports also help which bodes well for cities like Charlotte,” he says. “The glamour markets like NYC, San Francisco and Seattle are simply too expensive right now, but the large investors still like to place big bets in these markets, and of course, these investors will receive single digit returns, lower than the market overall.”

The Burnham-Moores Center for Real Estate’s Breakfast at the BMC Lecture Series at the University of San Diego was a sold out event with more than 280 attendees.