By Kevin Thorpe, Chief Economist and Rebecca Rockey, Economist
The U.S. economic expansion has been resilient in the face of slowing global demand in the first half of 2016. Key demand drivers that support property markets – consumer confidence, job growth, low interest rates and consumer spending – all remain firmly intact. As the second half of the year unfolds, we expect trade and investment categories to pick up steam, supporting stronger corporate profits, inflation and real GDP growth.
Cushman & Wakefield’s U.S. Macro Forecast for August continues to anticipate a moderate growth path for the U.S. economy – 1.6 percent in 2016 and 2.1 percent in 2017. This represents a sizeable downward revision from the May forecast and largely reflects the downdraft created by the slowing Chinese economy, the aftermath of Brexit and the related fallout in business investment. Net exports will put pressure on overall growth as exports fall year-over-year in 2016 before rebounding by 1.1 percent in 2017 as global growth improves. Total employment growth is forecast to increase but by a lower amount than estimated in the previous forecast.
Office-using job growth will continue to slow as a function of a tightening labor market, leading to a gradual decline in office space demand. Net absorption will total just over 60 million square feet in 2016, down from 81.1 million square feet in 2015. The vacancy rate will average13.2 percent for the year, 60 basis points below its 2015 value. Rent growth will achieve its highest rate in the cycle in 2016, growing at 5.5 percent. With the level of new construction expected to increase over the next two years and more supply coming online, rent growth is expected to decelerate in 2017 to a rate of 4.8 percent.
The outlook for the industrial sector remains promising. Warehouse and distribution space will continue to benefit from empowered consumers and the continued growth of eCommerce. At the same time, flex/R&D space will benefit from solid gains in high-tech employment sectors. U.S. industrial net absorption in 2016 is predicted to surpass 250 million square feet, besting last year’s record-pace of 246 million square feet. The vacancy rate is expected to tighten this year to 5.8 percent from 6.6 percent in 2015, before rising to 6.0 percent in 2017.
On the retail front, Class A projects will continue to garner the highest levels of demand, lowest levels of vacancy and positive rental-rate growth. Over the next two years, a combined 65.3 million square feet of net absorption will put downward pressure on vacancy, which is forecast to decline from 8.0 percent in 2015 to 7.3 percent in 2017. Although rent growth will remain bifurcated and a stronger-than-anticipated closure season continues to dampen its outlook, rents are still expected to increase by 4.6 percent in 2016.
Total sales volume for all property types – including land sales – will end the year 15 to 20 percent lower than in 2015. Still, sales volume will total $449.6 billion, on par with the level of activity in both 2006 and 2014. Sales of apartment assets remained the most robust this year and are up year-over-year despite financial market volatility earlier this year. Sales of land development sites, warehouse assets and hotels were hardest hit.
Commercial real estate markets have fared well: vacancy rates are falling, rent growth is positive and, for some asset classes, reaching a cyclical peak. Leasing velocity remains healthy as well. Impending regulations are expected to put pressure on capital markets activity, but the slowdown in sales volume and pricing is in line with a broader return to a more sustainable investment environment.
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. Mr. Thorpe 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. He is also frequently quoted in publications. In 2014, Mr. Thorpe was recognized as the nation’s most accurate economic forecaster with the NABE’s Outlook Award.
Becky joined Cushman & Wakefield in January 2014 as the U.S. Economist. Before joining Cushman & Wakefield, she worked as a consultant at a finance and economics consulting firm in the DC area, primarily working on loss forecasts for a national housing finance company’s single-family, fixed income portfolio. Prior to that, she was a junior economist at the Congressional Budget Office in the Financial Analysis Division.