by Kevin Thorpe, Global Chief Economist
Real estate investing is often about playing the odds, and the odds suggest there is still 90% probability that the expansion will continue and not be ending anytime soon.
Where Are We In the Cycle?
The No.1 question I get these days is where are we in the cycle? The growing anxiety around ‘the next recession’ explains the reluctance to put out capital this year. Investment sales are down 11% in the U.S.
Nobody wants to be telling the story that they bought at the peak just before things crashed.
The fact is that this cycle is on track to become the longest U.S. economic expansion in the post WWII era. We’re already in the third longest expansion on record—97 months and counting (as of Sept 2017). By March of next year, it will be the second longest, exceeding the 1961-1969 cycle. And, if we make to June 2019, it will officially hit the longest on record, surpassing the 10-year cycle experienced from 1991 to 2001. Also, it’s worth noting that expansions have become longer and longer over time. Look at the length of those expansion bars in the 1940s and 1950s versus recent cycles.
So, How Long Will the Good Times Roll?
Let me save you the suspense: I have no idea! No one knows. Still, as I’ll explain, this growth period appears to have a lot more steam. First, let’s take a look at some of the risks.
Recessions are typically brought on by two things: imbalances and a trigger. When we look at the economy today, there are certainly some things to watch out for:
- The stock market has been running pretty hot, and a suddencrash could be damaging enough to trigger a downturn. Then again, P/E ratios have gone higher than this before, companies are immensely profitable right now, and with monetary stimulus in places we’ve never seen before, isn’t it possible that P/E ratios could also reach new heights or at least maintain their current levels?
- A spike in oil prices has caused recessions in the past, but that seems highly unlikely this go around. Hurricane Harvey caused a temporary shock to oil production in the U.S., but it doesn’t change the fact that the world has become a lot better at producing oil primarily due to fracking.
- The Fed has caused recessions in the past, but they are being extremely careful. Even after recent hikes, the Fed funds target rate remains 200 bps points below the normalized rate and monetary policy remains highly simulative. Government policy is always a wild card, but so far the market has handled all of the political uncertainty really well.
From this vantage, I’m not seeing any flashing signs. If anything, recent economic data, which correlates well with real estate, is stronger now than at any other point in the eight-year cycle.
While many of us expected that the hurricanes in Texas and Florida would put a damper on growth, instead, preliminary estimates of GDP suggest that it expanded by 3% in the third quarter, underscoring the resilience of the U.S. economy. Confidence remains strong, with businesses continuing to grow and seeking more space. Manufacturing is improving and eCommerce-related growth has reached a five-year high, both of which are driving record absorption across our industrial markets.
Last year, we questioned whether the tech boom had run its course, but clearly that’s not the case. As the sector’s reach extends beyond the consumer to facilitate wide-spread enterprise transformation, the opportunities for tech companies continue to broaden. San Francisco, Boston, New York, Denver, and major Canadian cities, including Toronto, Vancouver, and Montreal—are just some markets that continue to be transformed by tech growth and its related job creation.
These are just some factors that we believe will sustain steady demand fundamentals, despite the maturing real estate cycle and wave of new supply that have helped drive the deceleration trend over the last year.
Kevin is Cushman & Wakefield’s Global Chief Economist, focusing on global economic trends and forecasts. He and the firm’s worldwide research team produce studies and statistics on topics affecting the global and U.S. economy, capital markets, finance, leasing fundamentals, property and project management and factors that affect supply-demand fundamentals in commercial real estate. Kevin has developed several econometric models to predict market trends, is a member of the National Association for Business Economics (NABE), and has authored numerous studies and survey reports. In 2014, he was recognized as the nation’s most accurate economic forecaster with the NABE’s Outlook Award.