Top 3 Economic Trends Affecting CRE

What's currently affecting the market?

The end of last week was marked by news affecting commercial real estate, mainly through its many and varied links with the residential market. Most directly, privately owned housing starts were at an annualized rate of 1.174 million units in June, according to the Census Bureau on Friday. That’s a spike of 9.8 percent above the revised May figure, and lest anyone believe that’s month-over-month noise—which isn’t an unreasonable belief—the June 2015 rate is 26.6 percent above the June 2014 rate. All of the monthly increase was because of an upward swing in apartment starts, up 28.6 percent for the month, while single-family starts actually dropped for the month by 0.9 percent.

Compared with last year, both single-family and multifamily starts are up considerably. Single-family starts increased by 26.6 percent, while multifamily starts were up 55 percent. An annualized rate of 1.174 million total units is historically low, as is anything below about 1.5 million, but it shows the market is edging back to “normal.” The higher the rate the better for commercial real estate. In the short run, after all, housing growth tends to stimulate the need for retail space, and indirectly, industrial space. In the longer run, more residential properties can stimulate demand for office space. All that’s good, provided residential starts aren’t bubble high, which was more than 2 million for a short while about 10 years ago.

In other news: The Consumer Price Index for All Urban Consumers increased 0.3 percent in June, the U.S. Bureau of Labor Statistics reported on Friday. Over the last 12 months, the all items index rose 0.1 percent. The index without energy and food—the core index, as they say—rose 0.2 percent in June. In addition to a rise in the cost of shelter, the cost of recreation, airline fares, personal care, tobacco and new vehicles were among those categories that increased in June. These advances more than offset declines in medical care, household furnishings and operations, used cars and trucks, and apparel. On the whole, a mild inflation is much better than the alternatives: deflation, which would be the harbinger of a major downturn, or too high inflation, which would cause other kinds of problems (including for property owners).

Finally, the preliminary University of Michigan consumer sentiment index for July was at 93.3, down from 96.1 in June. That was lower than expected, and maybe a sign that consumers took the summertime rise in gas prices to heart, or were worried about anemic pay increases, or something. Twice-a-month sentiment figures can be noise, too. On the whole, consumer sentiment is more or less where it was before the recession, having recovered from a long slide during the recession, and a slow recovery after that, with a few panicky drops along the way, such as when (some members of) Congress made noises in the summer of 2011 about letting the country default (note: a deficit ceiling fracas might be back again to haunt us by the end of the year).