Gross Domestic Product Up. Will That Benefit CRE?

The GDP might be stronger than it seems in ways that could benefit the commercial real estate industry.

On Friday the Bureau of Economic Analysis reported, in its preliminary report on U.S. economic growth in the fourth quarter of 2014, that real GDP was up an annualized 2.6 percent. That seems sluggish compared to the robust rate of 5 percent in the third quarter, and the number did inspire some hand wringing about the sustainability of the recovery. Was the third quarter a fluke? Or is the rest of the world, which isn’t growing so fast these days, starting to drag the United States down? Or is it the impact of the stronger dollar? All of these ideas have been floated.

But maybe the GDP report is stronger than it seems, and in ways that will benefit various parts of the commercial real estate industry. For one thing, growth tends to be revised upward in the second and third reports by the BEA, which will be out in the coming weeks. Besides that, some of the components of the overall metric were actually healthy. All of the following categories showed improvement: personal consumption expenditures (PCE), private inventory investment, exports, nonresidential fixed investment, state and local government spending, and residential fixed investment. PCE, which is essentially consumer spending, turned in annually growth of 4.3 percent, which ought to gladden the hearts of retailers. Also, real residential fixed investment—single-family structures, multifamily structures, home improvement, broker’s commissions and a few other categories—grew at 4.1 percent. Not too shabby.

The main drags on GDP in the fourth quarter were lower federal government spending, which knocked 0.54 percentage points from the total, but especially a higher level of imports. Imports count as a subtraction from GDP, and in the case of the fourth quarter they took 1.02 percentage points off the total.

In some ways, the quarter-by-quarter gyrations in GDP aren’t as telling as longer-term trends. Also important for the commercial property business, the BEA noted that investment in non-residential structures has been going up in recent quarters, as a percentage of GDP. Because of the recession, such investment dropped from just under 4 percent of GDP at the beginning of 2009 to just over 2 percent by 2011. As of the end of 2014, it’s back to about 3 percent. That’s roughly back to the level of the 1990s, but still low compared with earlier decades. From the end of World War II to the 1970s, investment in non-residential structures fluctuated between 3 percent and 4 percent of GDP, with an anomalous spike in the 1980s to more than 5 percent for a short time (they didn’t call it the go-go ’80s in development for nothing).