HOUSTON—Neither a trio of hurricanes, devastating wildfires in California nor the ongoing debate about the effects of pending tax reform could slow the pace of economic expansion, and that's among the reasons that Transwestern's Tom McNearney sees the momentum carrying forward into 2018. In the latest edition of Transwestern's the BRIEFING, McNearney notes that business investment increased 3.9% in the third quarter despite the hurricanes, and that longer term, institutions' portfolio targets for commercial real estate are up 20 basis points from a year ago to an average of 10.1%.
Even so, the Transwestern CIO sees a sober outlook among investors. “While there has been a general inflation in asset prices of all kinds, the markets do not appear to be suffering from the irrational exuberance that has characterized the end of other expansions,” McNearney says. “In fact, investors are exhibiting worry, uncertainty and caution.”
October marked 85 consecutive months of US job growth, an unprecedented streak of positivity in this metric. The October initial jobs report surged to 261,000 new positions and revised the negative estimates for the previous month into positive territory, with 44,000 jobs filled in September “despite setbacks in the wake of catastrophic hurricanes,” McNearney says. Accordingly, unemployment dropped to 4.1%, “a level which, under traditional economic models, would trigger predictions of greater wage inflation than we are seeing today.”
That being said, he notes that with full employment approaching, “it isn't surprising to see job growth start to slow, even with a record 6.2 million job openings.” Conversely, he adds, “Business investment, factory output, consumer and business sentiment and corporate profits are nearing all-time highs, suggesting this expansion has runway beyond the holiday season.”
That potential for expansion extends to most of the major property types, according to the BRIEFING. Drawing from Transwestern's recent Broker Sentiment Survey, McNearney cites expectations for moderate improvements in office and industrial fundamentals next year, with leasing velocity and asking rents in both sectors expected to be “slightly higher” overall.
Office and industrial diverge somewhat when it comes to both the development outlook and cap rates. Transwestern's broker survey indicates an expectation for a slight increase in the volume of industrial development and a slight decrease in the sector's cap rates; for office, two-thirds expect cap rates to remain flat or rise slightly next year, while a similar percentage expect the same for the sector's construction pipeline. In general, according to Transwestern, “survey results report significantly stronger conditions for the industrial market, with an index nearly 20 points higher than the strength of the office market.”
The latest BRIEFING offers a couple of “fast facts” related to retail and multifamily that suggest both opportunity and challenge. Citing data from the National Retail Federation, the report points to expectations of 2017 holiday retail sales outpacing the five-year average increase of 3.5% annual growth. Conversely, the report notes, “today, 44% of Americans live within 20 miles of an Amazon warehouse, vs. 5% in 2015.”
Similarly, the BRIEFING notes that homeownership climbed to 63.9% in Q3, up from 63.7% in Q2 and 63.5% a year earlier. At the same time, it reports, “three-fourths of households surveyed in August believe renting is cheaper than owning, up from 65% a year ago.”
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Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
