Optimism Replaces Pessimism

Remember the “double dip”? Less than six months ago there was such uncertainty about the sustainability of the economic recovery that many feared the US would fall back into recession. The Federal Reserve was so worried about the ability of the economy to grow that board members let it be known the central bank would purchase hundreds of billions of dollars in Treasury securities to ensure that the recovery is sustained. This week Federal Reserve Chairman Bernanke indicated that the Fed may not have to make all the purchases they planned.

A year ago, I was saying to clients that the economy would add about 1.0 million to 1.5 million jobs in 2010 and the reaction was skeptical. Many did not think the recovery would be that strong. Today, we look back at the past year and indeed the economy added a million jobs and it is considered a disappointment. After US GDP increased at a 1.7% annual rate in the second quarter and 2.6% rate in the third quarter, the consensus just a few months ago was that the economy would continue to grow slowly in 2011. Today forecasters are racing up revise their forecasts upward. I wouldn’t be surprised to see US GDP growth of 4.5% in 2011 with payroll employment growth somewhere in the 3.0 million range.

The US economy is about to shift into high gear. Growth is accelerating, employment growth will follow. This is being driven by corporate profits, which are up 65% from the recession low in late 2008. To continue to grow profits firms are shifting focus-from holding back spending and hiring to reduce costs to increasing spending and hiring to increase revenues.

This shift will have a major impact on the commercial real estate industry. More jobs, more demand and stronger spending will boost occupancy across the board. The result will be lower vacancy and upward pressure on rents. If there is going to be a surprise in 2011 it will be that the economy and the commercial real estate market is stronger than expected, not weaker.

Profits are back to pre-recession levels

Ken McCarthy
Senior Economist, Senior Managing Director, Research
Cushman & Wakefield

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