Washington, D.C.—In its latest report, Transwestern warns that the economy may not be growing as fast as some people think it is, and despite positive signs in the U.S. job market, there is a growing concern that the recovery is in a stall.
“Despite headwinds, the U.S. economy will muscle through, barring a major meltdown in China, Europe or Japan. However, these same headwinds make it very difficult to get the breakaway growth we have seen at this stage of other recoveries,” Tom McNearney, Transwestern’s chief investment officer, tells MHN. “Job recovery has been in lower paying jobs and industries, while the housing recovery has been positive but slowed recently.”
Among other factors for a possible stall in the economy, McNearney says, are higher taxes, reductions in the Federal Reserve stimulus and a slowing Chinese economy.
Investors have responded by fleeing to the relative safety of bonds, causing interest rates to fall—exactly opposite of what many pundits had predicted for 2014. According to the report, a three percent growth rate now appears to be unduly optimistic.
McNearney says that commercial real estate is still seen as a positive for most investors as adding commercial real estate lowers the overall portfolio risk and raises the return.
“First, stocks have been bid up to levels of concern, particularly if growth stalls. Second, bonds are at all-time highs with very thin yields and little margin for credit or interest rate risk,” he says. “Third, commercial real estate offers an attractive yield compared to the alternatives, with a hard asset as collateral providing some protection against inflation, investors quite frankly are starved for yield. The 10-year Treasury at 2.5 percent offers no real return after taxes and inflation.”
Additionally, commercial real estate has generally performed better than other assets in rising interest rate environments and institutions now see commercial real estate as an important component of their portfolios, providing positive cash flow and low correlation to other asset classes.
Multifamily is typically the first product type to recover, and the report shows that recovery is no different than others in this respect. However, significant new construction has some predicting we may be entering the end of the positive cycle.
“They are somewhat unnerved by the fact that new construction has approached and surpassed the recent norm of about 300,000 units annually,” McNearney says. “These pundits see 400,000 units as the high watermark that could lead to falling occupancies and rents. In the short term, I do not believe this is the case due to significant pent-up demand resulting from the lack of building during the recession and the fact that demographers estimate there are still 3 million echo boomers living with parents.”
A recent Joint Center for Housing Studies of Harvard University study concluded that even after the pent-up demand has been satisfied, the average annual apartment absorption should reach 400,000 for the next 10 years. According to this same study, apartments should be a viable investment for years to come with net absorption of nearly 4.0 to 4.7 million units through 2023.