US Economy Spurts in Q2

The economy needs to grow even more for real estate to hope to once again reach its historical levels of activity.

The U.S. economy did better than expected during the second quarter, coming in at an annualized growth rate of 3.9 percent, according to the Bureau of Economic Analysis on Friday. That’s the final estimate that the BEA will make for the quarter, and an improvement on its earlier estimates. It’s also a distinct improvement for growth compared with the weather-stunted first quarter, which came in at an annualized 0.6 percent. Pretty much every economic category did its part in Q2 to add to the growth: personal consumption, exports, state and local government, and the two categories that include various kinds of real estate spending: nonresidential fixed investment and residential fixed investment.

The BEA hasn’t released the final Q2 underlying details that illustrate growth in the real estate sector yet, but the agency’s second estimate, which came out last month, gives an indication of the direction of various sectors of the industry. For example, as of the second quarter of this year, investment in multifamily development and renovation accounted for about 0.25 percent of U.S. GDP—a rate that’s been steadily going up since it took a dip in 2008. In fact, 0.25 percent is roughly where the rate spent most of the 1990s. But historically speaking, that rate is low, which is part of the reason there’s a shortage of apartment units in some markets. From the 1960s to the 1980s, multifamily investment roughly ranged from 0.5 percent to 1 percent of GDP, an occasionally more.

In the commercial sector, the same pattern holds: a recent rise in investment in various property types (as a percentage of GDP), but nothing as robust as the last decades of the 20th century. Activity in the office market, for instance, has risen to about 0.3 percent of GDP, an improvement from slightly less than 0.2 percent immediately after the recession. But it’s a shadow of the go-go ’80s, when office development accounted for 0.8 percent of GDP or more, and even sluggish compared to the 1960s and ’70s, when it was generally around 0.4 percent. Historically, retail real estate has accounted for about 0.2 percent of the U.S. economy—a fairly consistent number in the last decades of the 20th century. Now it’s around 0.1 percent. The numbers are roughly the same for the hotel sector.

So the economy needs to grow even more for real estate to hope to once again reach its historical levels of activity (as a percent of GDP). Fortunately, there are indications that growth is continuing in the U.S. economy, beside the solid 2Q GDP numbers. For instance, as an indirect indication of economic activity, the U.S. Department of Transportation reported on Friday that travel on all roads and streets changed by 4.2 percent (11.4 billion vehicle miles) for July 2015 as compared with July 2014. Also, Black Knight’s First Look report for August said on Friday that the percent of mortgages delinquencies has declined 18.2 percent year-over-year. Finally, the University of Michigan consumer sentiment index for September came in at 87.2, up from the preliminary reading of 85.7, which isn’t bad. That kind of sentiment encourages people to spend, supporting retail and industrial and hotel real estate (more directly) and office properties indirectly.