by Kevin Thorpe, Global Chief Economist
The ball dropped as usual, but 2018 began “up”. All indications are that global GDP growth will accelerate in 2018 and remain strong in 2019. By extension, this will translate into another healthy year for the property markets and, perhaps, if certain things fall into place, it could be a record-shattering year.
Why the optimism?
- Strong momentum from 2017
- ”Stimulative” tax policy
- Still-low interest rates and inflation
- The wealth effect of rising equity markets and housing markets
- Robust fundraising for CRE into 2018
- Healthy labor markets
- Sky-high business and consumer confidence
Moreover, unlike the global stock markets, the commercial real estate sector did not break record after record last year. If history is any guide, global capital will rebalance and flow more aggressively to other assets classes in 2018. So perhaps, given the strengthening economic backdrop and still low interest rates, CRE will go on a stock market-like-run in 2018.
We’re also observing growth all around the world – 75-80% of the world economy is sharing in this acceleration. Advanced economies are solid and emerging economies are beginning to soar. This is encouraging as we forecast the year ahead:
- Asia Pacific will continue to be fastest growing region powered in part by continued strength in China.
- The US economy is already strong and recent tax cuts will likely boost growth even further, and demand for labor is stronger than ever.
- Assuming no dramatic changes to trade policy, Canada will move in tandem with the U.S., and Latin America is finally pulling out of its commodities slump.
- Continental Europe is surging. In the Eurozone, employment is rising at its fastest pace in over a decade. Brexit has not had a huge negative effect on the UK thus far, though it had a slight cooling effect on property values. Uncertainty surrounds Brexit negotiations and the UK’s medium-to-long-term economic relationship with the EU, but investors are increasingly comfortable with the likely scenarios.
We are in what many call a “Goldilocks economy”. The global economy is getting healthier and, importantly, shows no signs of overheating. Average core inflation remains below 2% in most of the world, particularly in the OECD nations. Central banks are not in a rush to raise interest rates too aggressively. Ultimately, we are looking at an economy that is steady, nearly operating at its optimal state, but at the same time it’s not too hot, keeping inflationary pressures subdued and interest rates low. For commercial real estate, that’s about as good as it gets.
Expect “Good”, but it could be “Sensational”
2018 capital markets are likely to be as strong as 2017, if not stronger. There is no shortage of capital looking for the right opportunities; fundraising for commercial real estate investment and dry-powder metrics remain spectacular. Finding yield is becoming more difficult at this later stage in the cycle, but spreads are still very attractive compared alternative investments such as treasuries and corporate bonds. This will keep capital flowing into the CRE industry. And again, stock market wealth could spill over into CRE and move the needle even further.
All of that said, the old adage that “all real estate is local” has never been truer. In fact, given the unevenness in today’s market, let’s add the word “intensely”: all real estate is intensely local. Depending on the product, the geography, the submarket, the block, the floor plate – it can very easily be an investor market on one side of town and an occupier market on the other. Rigorous due diligence at this stage in the cycle is an absolute must.
There are always downside risks, and we are monitoring a variety of indicators very closely and sharing that insight frequently with our clients. We enter 2018 with momentum and with the expectation of it being a really good year, with the potential of it being a sensational year for the CRE industry.
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.