Expansion Holds Steady, Seven Years On

Thorpe says the lowered forecast for GDP growth reflects the downdraft from recent events, including Brexit.

NEW YORK CITY—Seven years into a domestic recovery, the US economy remains sound although it encountered heavy weather in the first half of this year. “There is no doubt that slowing global demand did diminish trade and investment,” says Kevin Thorpe, Cushman & Wakefield’s global chief economist. “However, as the second half of the year unfolds, we expect those categories to pick up steam, supporting stronger corporate profits, inflation and real GDP growth.” That being said, Cushman & Wakefield is now calling for a more moderate pace of continuing growth than it did three months ago: 1.6% this year and 2.1% in 2017, a sizable downward revision from the May forecast. Thorpe says it largely reflects the downdraft created by the slowing Chinese economy, the aftermath of Brexit and the related fallout in business investment. Cushman & Wakefield’s latest US Macro Forecast predicts that net exports will put pressure on overall growth as exports fall year-over-year in 2016 before rebounding by 1.1% next year as global growth improves. Total employment growth is forecast to increase but by a lower amount than estimated in the previous forecast. At the annual Federal Reserve meeting in Jackson Hole, WY, chairman Janet Yellen signaled that the central bank’s Federal Open Markets Committee was more ready to press ahead with a modest interest rate increase. “In our baseline scenario, we assume the FOMC will raise rates again by one quarter of a percentage point at its next meeting on Sept. 21,” according to the US Macro Forecast. “That of course assumes employment and inflation data will remain on their current courses and no major stumbles related to pre-election jitters in the U.S. will occur. International drivers that were suppressing inflation are slowing, and monthly noise aside, labor markets continue to tighten.” Those tightening labor markets will lead to a continuing slowdown in growth of office-using jobs, leading to a gradual decline in office space demand. Net absorption will total just over 60 million square feet this year, down from 81.1 million square feet in 2015. The vacancy rate will average 13.2% for the year, 60 basis points below its ’15 value. Meanwhile, rent growth will achieve its highest rate in the cycle in ’16, growing at 5.5%. On the industrial side, Cushman & Wakefield sees net absorption surpassing 250 million square feet this year, topping last year’s record-setting pace of 246 million square feet. The vacancy rate is expected to tighten this year to 5.8% from 6.6% in ’15, before rising slightly to 6.% in ’17. Over the next two years, a combined 65.3 million square feet of net absorption will put downward pressure on retail vacancy, which is expected to decline from 8.0% last year to 7.3% next year. Although rent growth will remain bifurcated and a stronger-than-anticipated closure season continues to dampen its outlook, rents are still expected to increase by 4.6% this year. Conversely, total sales volume for all property types will end the year 15% to 20% lower than in ’15. Even so, Cushman & Wakefield says, sales volume will total $449.6 billion, on par with the level of activity in both 2006 and 2014. “Commercial real estate markets have fared well,” says Rebecca Rockey, head of Americas forecasting at Cushman & Wakefield. “Vacancy rates are falling, rent growth is positive and, for some asset classes, reaching a cyclical peak. Leasing velocity remains healthy as well. Impending regulations are expected to put pressure on capital markets activity, but the slowdown in sales volume and pricing is in line with a broader return to a more sustainable investment environment.”