Economy Watch: A Reason CRE Deals Continue to Move Forward

By Dees Stribling, Contributing Editor

Even before the Federal Open Market Committee released the minutes of its latest minutes on Wednesday, few observers expected the Fed to adjust interest rates upward this summer. During the relatively robust days of late 2014, there was a fair amount of such speculation, but as the new year spat out discouraging economic reports, the air slowly leaked out of that idea. The Fed might be purposely vague in its pronouncements, but there is an underlying principle that the central bank does seem to stick to: the economy has to be really healthy for more than a few months before rates will go up. Since low rates haven’t seemed to cause much inflation, the Fed probably doesn’t see any reason to do things any other way.

“Participants continued to judge that it would be appropriate to raise the target range for the federal funds rate when they had seen further improvement in the labor market and were reasonably confident that inflation would move back to its 2 percent objective over the medium term,” the minutes said, which is straightforward enough. The minutes further said that “a few” anticipated that the information would be positive enough by the June meeting that rates could go up. “Many” participants, however, thought that unlikely. So for now, the ultra-low interest rate survives. As a continuing lubricant, it’s been one reason that CRE deals continue to go forward at a strong pace.

On the other hand, anticipated CRE development is now a bit weaker than it was only last month. On the same day as FOMC released its minutes, the American Institute of Architects released the latest Architecture Billings Index. The index was down for the second month this year. As a leading economic indicator of construction activity, the index reflects the nine- to 12-month lead time between architecture billings and construction spending. The April score was 48.8, down sharply from 51.7 in March. The score reflects a decrease in design services (any score above 50 indicates an increase in billings). The new projects inquiry index, however, was 60.1, up from a reading of 58.2 the previous month.

Does this downtick represent monthly noise or something worse for the near future of CRE projects? AIA chief economist Kermit Baker asserts that “the fundamentals in the design and construction industry remain very healthy,” and the fact that both inquires for new projects and new design contracts continued to accelerate points to strong underlying demand for design activity, he says. Still, April would typically be the month where these projects would be in full swing. The weather in the many parts of the Northeast and Midwest was crummy enough last month to delay progress on some projects. But on the other hand, a weakening economy would also delay progress on projects. The next few months of the Architecture Billings Index ought to confirm which of these explanations is correct.