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Mixed Indicators Show Goldilocks Economy Isn’t Overheating ‒ And That’s a Good Sign for CRE

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Commercial real estate professionals surveyed by PricewaterhouseCoopers aren’t jumping up for joy at the state of the U.S. economy, but for the most part, they’re not too worried either.

“That sentiment of being very, very strong has leveled off,” PWC partner and business development leader Mitch Roschelle said at last week’s 10th annual Israel-U.S. Real Estate Investment Conference in Tel Aviv.

“Those who say prospects are good are on the rise. Those who say prospects are excellent are on the decline,” he said. “I don’t think this is a cause for concern at all.”

Economic signals over the past year have been mixed.

While U.S. employment numbers have been good, with more jobs added in January for the 100th consecutive month and wage growth steady, this month the Commerce Department reported the sharpest drop in retail sales in nine years.

The slowdown in consumer spending prompted forecasters to lower their estimate of Q4 GDP, and lower fourth-quarter numbers could in turn push 2018 growth below the administration’s 3% target.

What inning are we in?

Roschelle said people are always asking what inning we’re in when it comes to the economic cycle. But the key thing to remember when employing the baseball metaphor, he said, is that a game ends after the ninth inning only if there’s a winner. “If no one’s won, you keep playing,” he said.

“The key ingredient for the success of real estate investment is the U.S. economy,” said Roschelle. “Yes, we’re 116 months into this expansion. But we still haven’t overheated the economy the way other recoveries did that caused those recoveries to stall.”

David Lazarus, a managing director at New York-based brokerage Eastdil Secured, which sponsored the conference along with law firm Goulston & Storrs, said the current U.S. economy is a “Goldilocks environment” that’s just right for commercial real estate.

“We like when we have good economic growth but low interest rates,” said Lazarus, who co-heads Eastdil’s New York office. “That is a very, very good dynamic for real estate.”

Multifamily concerns

There were some cautionary notes sounded, however.

“There is something to worry about, and it’s the multifamily space,” said Richard Flohr, managing director of the CrossHarbor Strategic Debt Fund for Boston-based alternative investment management firm CrossHarbor Capital Partners.

Flohr said areas of concern include the oversupply of class A multifamily construction in areas where there is insufficient demand for high-cost housing and the possible removal of Freddie Mac and Fannie Mae from conservatorship.

Joseph Otting, acting director of the Federal Housing Finance Agency, was reported as saying in January that the government was expected to recommend ending Fannie and Freddie conservatorships, news that bumped up shares of the government-sponsored enterprises.

$145 billion of multifamily capital came from Fannie Mae and Freddie Mac,” said Flohr. “Think about what would happen to our world if $145 billion of capital went away.”

Meanwhile, Roschelle warned of the long-term threat of population changes, with the U.S. death rate rising faster than the birth rate.

Lazarus said the market is cautious about suburban office properties, retail (“despite good numbers from REITs”) and assets with material recurring capital expenditure, such as office spaces with landlords paying for amenities. He also said global volatility is “something we’re watching.”

Related stories:

View from the Top: What the CRE Market Thinks about 2019 ‒ A Tale of Two Cocktails

Multifamily Gets a Boost as Buying a Home Becomes Less Affordable

This Week in CRE: Banks Tighten CRE Lending Standards, Q4 Lending Climbs, Charlotte Russe Files Chapter 11

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