Economy Watch: Real Estate’s Part of the GDP

By Dees Stribling, Contributing Editor

After releasing the 30,000-foot view of U.S. economic growth for each quarter, the Bureau of Economic Analysis releases a load of detail the next day, which in this case was Thursday. The underlying details include real estate data that breaks down total spending on most property types, as a percentage of GDP. As reported previously, the big quarterly change in Q1 2015 was investment in non-residential structures fell at an annualized rate of more than 23 percent, which seems to involve real estate; but that change was because contraction in the energy sector, including oil exportation and electrical infrastructure spending. Take those two industries out of the equation, and spending on non-residential structures didn’t actually change.

Investment in single-family housing as a percentage of GDP was up a bit in the first quarter, to just over 1 percent. That’s the highest that kind of investment has been since the crash in residential construction beginning in 2007 and bottoming out about two years later. At the peak of the housing bubble, single-family housing represented nearly 3.5 percent of GDP, clearly (in retrospect) an unsustainable level. At the bottom of the crash, single-housing was barely more than 0.5 percent of GDP, which probably isn’t enough. In fact, housing’s share of the economy was so low that home improvement (which is calculated separately) was a larger share of the economy than the houses themselves.

Despite the intense demand for multifamily properties in the post-recession period, investment in that sector isn’t as much (again, as a percentage of GDP) as it was before the recession, though it’s recovered somewhat, to roughly 0.25 percent of GDP. In the 2000s, multifamily represented much closer to 0.5 percent and, back in the 1960s and ’70s, the sector was usually more than 0.5 percent and occasionally more than 1 percent. As metro areas expanded during those decades, and the Baby Boomers formed households, apartments were the thing to develop (and the NIMBY prejudice against apartments in some places didn’t really catch on until the 1990s). Will the Millennials in their turn spur such a vast increase in apartment development? So far, there’s no answer to that.

On the commercial side, the office sector is growing again as a percentage of GDP, representing about 0.25 percent of the economy. Before the recession, however, the total was more than 0.4 percent, and during the 1980s—they weren’t called the days of go-go office development for nothing—the office sector peaked at nearly 0.9 percent of the economy. That was partly a function of Baby Boomers entering the workforce, both men and women, in droves. Though also improving in the post-recession year, retail and hospitality are also low compared with previous decades, coming in at about 0.1 percent of GDP these days.