The macroeconomy and real estate markets had a good performance in 2017. Real GDP rebounded to annualized growth rates above 3.0 percent in the second and third quarters. Commercial properties in most markets enjoyed sustained growth of demand, high occupancy rates, rising rents and rising prices.
These advantageous conditions may well continue into 2018, but there are several risks that might cause a change in the outlook. Will GDP growth and the job market run out of steam next year? The Fed has signaled that further increases in interest rates are on their way; how far will they raise rates, and what will be the impact on commercial real estate? Commercial construction has been on an uptrend for several years; will demand growth keep up?
The tax bill currently under consideration on Capitol Hill will almost certainly have important impacts on the economy, financial markets, and real estate. The discussion that follows does not include any specific consideration of the proposed tax reform changes, as that is still pending.
Following are the top ten developments in the economy and real estate markets to watch in 2018:
Macroeconomic outlook
- GDP: Will GDP growth in 2018:Q4 compared to a year earlier (a) slow to less than 2.2 percent; (b) stay between 2.2 percent and 2.5 percent; or (c) accelerate above 2.5 percent?
- Wages: Will wages (average hourly earnings) in 2018 rise (a) less than 2.3 percent; (b) between 2.3 percent and 2.6 percent; or (c) more than 2.6 percent?
- Inflation: In 2018, will inflation (a) remain well below the Fed’s target, with the core PCE deflator rising 1.7 percent or less; (b) move in line with the target, rising between 1.7 percent and 2.2 percent; or (c) overshoot the target, rising more than 2.2 percent?
Financial markets
- Federal Reserve policy: At the end of 2018, will the Federal funds rate be (a) 2 percent or less (i.e. below the dot representing the middle response of FOMC members in the “dots” chart); (b) between 2 percent and 2.25 percent (on the median dot); or (c) more than 2.25 percent (above the dots)?
- Long-term interest rates: At the end of 2018, will the yield on the 10-year note be (a) below 2.50 percent; (b) between 2.50 percent and 3.00 percent; or (c) higher than 3.00 percent?
Commercial real estate markets
- Multifamily properties: Will multifamily vacancy rates (a) move back above 6.0 percent; (b) stay in the 5.5 percent to 6.0 percent range; (c) fall below 5.5 percent?
- Office markets: Will office rents in the fourth quarter of 2018 be (a) less than 2.0 percent higher than in the fourth quarter of 2017; (b) rise a bit faster to be 2.0 percent to 3.0 percent higher; or (c) accelerate to more than 3.0 percent over the prior year?
- Retail property markets: In 2018, will the occupancy rate of Retail REITs, as reported in the Nareit T-Tracker®, (a) fall below 95.0 percent; (b) be in a range between 95.0 percent and 96.0 percent; or (c); rise above 96.0 percent?
- Industrial markets: Will demand for industrial space (a) decline in 2018; (b) increase, but remain below the 2016 mark; or (c) move to a new high above 237 million sq ft?
- Property prices: In 2018, will commercial property prices (measured by the CoStar Commercial Repeat Sales Index (CCRSI)) (a) decline; (b) rise by less than 5 percent; (c) rise more than 5 percent?
See the full research piece for further discussion of the various scenarios for each of these, as well as my assessment of the likelihood of each outcome.