The Upward Climb Isn't Over Yet

NEW YORK CITY—Commercial real estate, domestic and—to a more variable extent—overseas, has managed to climb out of the deepest economic trough in more than 70 years. In the long term, the evidence suggests that it will keep on climbing.

That's not to suggest that the climb from here will be steep, or that there's open-ended potential for ever-increasing gains in all metrics. For example, the Urban Land Institute's Consensus Forecast this past spring predicted that US commercial property investment sales volume would reach $470 billion this year and $500 billion during both 2016 and 2017. But Situs RERC's take on that prediction is that it indicates that “a peak will occur during that time,” rather than that subsequent years would see the annual total continue to increase.

However, Situs RERC's spring report also notes that any long-term projections are subject to change, “depending on how strong the commercial real estate market is going forward.” Commenting on DTZ's US Macro Forecast, chief economist Kevin Thorpe said in June, “It is always difficult to predict with any precision when an expansion will come to an end, but the latest data on confidence, jobs, debt ratios and capital flows shows there is little evidence to suggest the US expansion can't on go for a lot longer. From a commercial real estate perspective, the odds are heavily in favor that expansion has a lot of runway left.”

ULI's most recent consensus of 43 industry economists, released in April, noted upward revisions from six months earlier in all but one indicator. The prediction for transaction volume, to cite one example, was revised upward from the October 2014 projection of  $25 billion for this year and $445 billion for next year.

On a macroeconomic basis, the unemployment rate is expected to continue declining to 5.0% by '17, and employment growth will continue over the next few years, although it will moderate from 3.15% this year to 2.5% in '17. That more modest pace of job growth, though, looks downright brisk compared to the four-year period between 2007 and 2010, when annual employment growth reached no higher than 1.14% ('07) and bottomed out at negative 5.09% (2009).

GDP growth similarly is expected to peak at 3.0% for each of the next two years before tapering off to 2.8% in '17. Each of these years, however, will represent the first time this metric has exceeded the 20-year average since '10, when it rebounded—weakly—from a 2.8% decline the year prior.

In the near term, DTZ's forecast sees the biggest threat to US growth as the global economy. “Globally, the picture is messy,” it said. That being said, a blog last month from Chris Puplava, portfolio manager at San Diego-based PFS Group, sees the worldwide picture beginning to stabilize, citing May improvements in the 10 of the 13 leading economic indicators measured by the Conference Board.

“Growth rates are starting to turn back up after decelerating for several months and we are also likely to see a pickup in inflation and interest rates,” Puplava wrote. “There appear to be two wild cards holding back equity markets, which are the ongoing Greek debt saga as well as the debate around when the US Fed will raise interest rates. The uncertainty behind these two issues will likely keep equity markets in a holding pattern but at least it appears the global economic backdrop is improving, which should soften any market decline if it were to occur.”  

Although it might be an exaggeration to call energy price fluctuations a black swan—historically, they have been volatile—over the past year the global economy and, therefore, commercial real estate, has seen the near-term effects of changes in pricing levels. Domestically, for example, North Dakota, the nation's second-largest oil-producing state, experienced a significant drop in its employment rate this past May, while Houston saw more than one million square feet of office space come back on the market in the first four months of 2015, Xceligent regional director Brad Hauser told GlobeSt.com in May.

Over the next few years, the Conference Board sees one of four oil-pricing scenarios occurring globally, with varying economic consequences for each. The two most favorable would be either stabilization at a lowered price level of $50 to $65 per barrel or recovery of prices to over $75 per barrel.

The former would boost both consumer spending in mature oil-importing economies and government spending in emerging oil-importing countries like China and India, while the latter would reflect higher-than-expected global growth and oil demand. Considerably less salutary would be a collapse in prices to under $40 per barrel—a scenario that would be likely were both governments and oil companies to continue maximum production against a backdrop of weak economic growth—or a boom/bust period in which oil prices went north of $110 per barrel and then south to less than $60, with continuing global volatility the result.