Reasons for Optimism, Pessimism in the Year Ahead

LONDON—In June, the US economy reached its 121st consecutive month of economic expansion. That broke the previous record of growth, which spanned from 1991 to 2001. While this decade of sustained growth is precedented, some executives surveyed in the latest 2019 DLA Piper Annual State of the Market Survey, expect the next 12 months to continue to produce positive results.

In the prior survey (conducted during the government shutdown), 42% of respondents said they had a bullish outlook for the next 12 months. In the 2019 survey, that percentage jumped to half of participants.

Forty-eight percent of respondents expressed optimism about the overall health of the economy and another 43 were optimistic because of the abundance of capital still chasing deals.

“I continue to think that the fundamentals and the real estate market are still pretty good,” DLA Piper’s Global Real Estate Practice Co-chair John Sullivan tells GlobeSt.com. “Leverage is relatively low. So, I think that if we have a correction in real estate, it’s likely to not be that severe.”

Those who are bearish about the next 12 months, cite the unpredictability of trade policy, combined with the upcoming election, which concerned 37% of the bears.

“The CEO and chief investment officer of any business, not just real estate, will tell you the one thing they want to know is what the rules are,” Sullivan says. “Then they can make decisions. The hardest time to make decisions is when there is substantial uncertainty.”

Outside of political concerns, 30% of the bears were pessimistic about nearing the end of the cycle. “I think that it [the end of the cycle] is definitely playing on people’s minds and has been playing on people’s minds for the last couple of years,” Sullivan says. “There are lots of people that look back over 50 or 75 years of history, see how long cycles typically last and know that we’re already past it [the typical end of cycles]. So, they’re getting nervous.”

Part of the problem for the CRE industry is continuing to match the strong growth pace in previous years. With transaction volume reaching $576.1 billion, 2018 was a record high year for deals. That strong 18% growth will be tough to match this year.

As deal volume has risen, so have prices, which Sullivan says also registers as a concern for the next 12 months. “In the gateway cities and now in a lot of other places, the phrase that gets used in the real estate industry is ‘priced to perfection,’” he says. “Assets have gotten very expensive and that’s connected with where are we in the cycle.”

Any problems with those deals could set the stage for buying opportunities beyond the next 12 months, which would give even the bears something to look forward to.

“If you have a market correction and you have a decline in price, you could see more activity by almost all investors,” Sullivan says. “It’s been very challenging for the Opportunity Fund investors to get the kinds of returns that they want. So, some of them are probably secretly hoping for some kind of correction to create more buying opportunities.”