Ahead of the Curve: A Potential Inflection

摘要

The national economy is struggling to gain some momentum to catapult it out of the doldrums. While recession fears are relatively muted, it appears that the economy is in for a prolonged period of below-par economic growth. The employment situation continues to improve, although job growth has slowed along with the broader economy. While unemployment has leveled off at around 5%, the aggregate figures do not accurately reflect underemployment that is likely to continue. There has been some good news for workers on the wage front, with increases in the minimum wage in some locations and national changes in overtime pay. Inflation continues to be in check, helping cushion the lack of wage growth. Interest rates remain low and credit is fairly accessible, although there is some risk the Fed will move more quickly than expected on its next interest hike. At the global level, a number of issues cloud the economic outlook. These range from nagging concerns over how China will deal with its economic slowdown to how Japan and other countries will react in the face of pressure to devalue their currencies. Until now, central bankers and finance ministers have resisted devaluing currencies, but the lack of progress on the economic front is amplifying currency risk, which could quickly spill over to other countries. The UK referendum on Brexit has raised concerns across the eurozone and other countries and punctuates the interconnectedness of the global economy. Confidence levels have been tested recently, with declines in both consumer and CEO confidence as a result of the growing uncertainty surrounding the domestic economy as well as prospects for global growth. Retail sales have been somewhat disappointing, although in line with economic conditions and consumer confidence levels. Beneath headline sales figures, the retail industry continues to undergo change as traditional retailers respond to online competitors and online retailers seek competitive advantage in dealing with an increasingly fickle and demanding consumer. The housing market has shown some signs of improvement, although the recovery has been muted. Housing starts have declined for both single-family and multi-family residential properties in line with economic uncertainty, although housing sales have improved. Housing appreciation rates have moderated but still are improving. On the real estate investment front, there are some signs that the prolonged bull market has started to cool off. This is evidenced by factors such as a slowdown in CMBS issuances and some tightening in underwriting standards. Despite these changes, the mortgage market remains competitive and should not be a major drag on the industry. In terms of transactions, sales volume declined through April, a trend that that has received much attention. The decline in transactions affected both the private and public markets as well as most property types. The apartment sector appears to be nearing the end of its own bull cycle. Investment performance has been mixed, with the NCREIF Property Index still reporting low double-digit returns on a rolling four-quarter basis through the 2016 first quarter. It should be noted that these total returns include record-low income returns, which suggest some correction may be on the horizon. The public market has been somewhat volatile in line with the overall economy, but even after a rocky 2016 start it has moved into positive territory for the year to date. Going forward, the real estate industry should benefit from increased exposure of REITs and real estate as the S&P Dow Jones Indices and MSCI stock exchange elevates real estate companies and equity REITs to the status of a distinct real estate sector. At the same time, changes to the Foreign Investment in Real Property Tax Act should act as a catalyst to foreign investment. On the property front, real estate fundamentals continue to improve, albeit at a slower rate than throughout 2015. All in all, as 2016 unfolds the commercial real estate market is approaching the real possibility of an inflection point and this bears close monitoring. This situation, plus a contentious presidential election, guarantee an interesting year.