Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
Issue link: http://cire.epubxp.com/i/923123
January | February 2018 25 Peshova and Maxiphoto I f there is one word that sums up the state of the U.S. economy these days, it's resilient. The prolonged eco- nomic growth cycle hasn't been terribly exciting or robust, and at times, progress has been downright choppy. But it has proven to have staying power, and econ- omists are anticipating that the current economic cycle could turn out to be a record-breaker. The economy has performed well during the past year. Issues with North Korea and rampant tweets from Presi- dent Donald Trump, as well as no results on healthcare reform, immigration, or infrastructure spending, have not derailed it, notes K.C. Conway, CCIM Institute chief economist for 2018 and director of research and corporate engagement for the Alabama Center for Real Estate at Cul- ver House College at the University of Alabama. "The economy has been pretty resilient, and I think the fundamentals are in place for the economy to stay resil- ient," he says. "Throughout this expansion, there have been several curve- balls thrown at the U.S. economy," agrees Kevin Thorpe, global chief economist at Cushman & Wakefield. Curveballs include Brexit; China's economic slowdown; volatility in the stock market; highs and lows within market segments in tech and energy; as well as political uncertainty. Yet the economic expansion has weathered those ups and downs. "There is a resiliency to this expansion in the U.S., that on the commercial real estate side, you have to feel pretty confident about," he adds. Barring any unforeseen disruption, January will mark the 102nd consecutive month of the economic recovery, mak- ing it the third longest since World War II. The recovery from 1991 to 2001 was the longest at 120 months and from 1961 to 1969 the second longest at 106 months. Leading indicators suggest that the current cycle could reach and, even exceed, those previous highs. The natural tendency is to look at the long-running recovery cycle and assume that, after eight or nine years of growth, an end point in the cycle must be looming right around the corner. "Expansions don't die of natural causes," says Christo- pher Thornberg, Ph.D., founding partner of Beacon Eco- nomics in Los Angeles. "They don't just run out of steam because they are old." Generally, some shock occurs to the system that brings on a downturn. Despite the many conversations about this being late in the cycle, there is no reason to expect a reces- sion anytime in the near future, Thornberg says. There are certainly issues in the economy, but there are no looming problems in the credit markets, no major oversupply, and no problems related to too much borrowing or too much spending, he says. Positive Momentum Across the board, economists are predicting that gross domestic product growth will continue at a rate of 2 to 2.5 percent for the next two years. "Although that growth rate does not sound exciting for many people, from a com- mercial real estate perspective, it is a good growth rate," Thorpe says. In fact, a 2-percent GDP falls right in the sweet spot for commercial real estate, he says. That modest growth is good enough to generate jobs and healthy demand for real estate across most sectors. But because it is not too good, it also keeps interest rates and inflation low, he says. Everyone is asking whether the current prolonged cycle is winding down, or if there is still room for late-cycle momentum. The answer is not that simple, because dif- ferent countercurrents run through the economy. The property markets and conditions also vary by city and by submarket, notes Hans G. Nordby, managing director of CoStar Portfolio Strategy in Boston. The outlook for the broader U.S. economy is that it is in the eighth inning of a 13-inning overtime game. There continues to be many positive forces fueling economic expansion, including steady job growth, increasing house- hold formations, strong consumer confidence, low interest rates, low fuel prices, and a recent surge in values in the stock market during the past year. "Suffice it to say that most of the near-term leading indi- cators are flashing pretty bright green," Nordby says. "We don't have a reason to expect a recession in the U.S., barring an ignominious shock, for the next 12 months." Volatile Political Landscape Certainly any number of potential risks or shocks could pop up to slow or stall economic growth, including geopolitical risk, inflation, rising interest rates, and a labor shortage. "The primary risks our economy faces right now are political risks," Thornberg says. Much of that concern is focused squarely on President Trump. Twitter wars aside, some economists are concerned about how President Trump and his administration will move forward on foreign policy and trade agreements. Will Presi- dent Trump and the U.S. Congress will be able to deliver on campaign promises related to healthcare and fiscal stimu- lus? Since Congress recently passed tax reform, it is not clear how markets will react to that and how it could shake confidence in the economy. The tight labor market, with U.S. unemployment hov- ering at 4.2 percent, also is viewed as a potential risk to economic growth. "We're running out of people who are worth hiring, and we don't let educated immigrants stay