Economy Watch: Are Investors Pulling Out of U.S. Real Estate?

The declining Conference Board's Consumer Confidence Index is putting CRE investors on edge.

Do month-over-month movements in consumer confidence mean much? Maybe, or maybe not. Like any monthly indicator, they’re prone to froth, and consumers in particular react to transitory events—or perhaps overreact. Even so, when the indicator moves a lot suddenly, something might be up with the economy, and certain kinds of CRE landlords, such as retail owners, would do well to pay a little attention. There hasn’t been any one single shock to the system in the last few weeks to set consumers on edge, but even so the Conference Board’s Consumer Confidence Index, which had improved in June, declined in July.

The Index now stands at 90.9 (1985 = 100), down from 99.8 in June. The drop was unexpected. The organization’s Present Situation Index decreased moderately from 110.3 last month to 107.4 in July, while the Expectations Index declined sharply to 79.9 from 92.8 in June. So someone’s nervous about the near future. Then again, even at 90.9, the index remains at levels associated with an expanding economy and a relatively confident consumer, the Conference Board’s director of economic indicators Lynn Franco noted, adding that events in China or Greece might have something to do with the monthly movement. The world of 24-hour news can make anyone nervous, after all.

By contrast, one would think that professional investors wouldn’t be as susceptible to a herd mentality when it comes to economic news. But if the movement of equities markets means anything, it might be that the pros can get spooked too. And so it seems in July: State Street Global Exchange’s State Street Investor Confidence Index for decreased to 114.6, down 12.5 points from June’s revised reading of 127.1—an equally sharp drop for a month. Confidence among North American investors decreased too, with the North American index falling 20.6 points to 122.6. Above 100 is still positive, since an index higher than that means investors are increasing their long-term allocations to relatively risky assets. The index is based on actual trades, as opposed to the opinions of institutional investors.

Nervous investors have a different kind of potential impact on CRE. Namely, they could move their assets to something considered safer, such as Treasuries; that was the case during the grim years of 2009 and ’10. So far there’s no indication of a movement of investors out of U.S. real estate. It’s going to take more than unpleasant events in China and Greece to upset investors. Even an interest rate hike—which conventional wisdom is now putting in September—probably won’t dampen investor appetite for CRE (the FOMC is now meeting, but no one expects a sudden announcement).