Macroeconomic fundamentals

The most recent data on state unemployment rates from the Bureau of Labor Statistics show that, compared with April, unemployment decreased in 22 states, increased in 11 states and was unchanged in 18 states.

Demand continues to exceed supply in real estate markets, leading to lower vacancies, rising rents and accelerating NOI. There are few signs of any meaningful slowdown ahead. 

The recovery in commercial real estate markets for the past several years has been uneven and often disappointing, much like the economy as a whole. More recent news, however, shows a turn for the better—and also signs that conditions may continue to improve.

Many analysts have noted that increasing construction and high prices on commercial properties often presage a downturn in the sector, and have asked whether this cycle may be approaching the 9^th inning. NAREIT research economists have examined data from several sources to shed further light on the risks that the sector may be approaching a correction.

Macroeconomic data generally suggest that the U.S. economy remains in an extended period of soft growth and soft inflation—in fact, Federal Reserve officials have signaled their intent to continue monetary stimulus and tolerate slightly higher inflation to protect against further macro weakening. How have REIT investors fared in past periods of strong or weak macroeconomic growth, and high or low price inflation?

The April release of state unemployment rates from the Bureau of Labor Statistics provides additional evidence that, in most of the country, labor markets are healthy and continue to strengthen. An exception to this improving trend is in oil producing states, where unemployment rates have been rising. 

The January release of the Job Openings and Labor Turnover Survey from the Bureau of Labor Statistics last week provides additional evidence that the labor market continues to tighten despite concerns about financial market volatility and weak foreign economic growth.

Commercial mortgages are to the real estate market like rainfall is to a farmer. Too little rain and the crops dry up, but too much and floods can destroy the fields. In commercial real estate, too little credit and business is stifled, but too much debt can lead to speculation, overbuilding and defaults.

Strong and growing demand for commercial real estate in 2015 carried into the new year. Commercial property transactions totaled $139 billion in January, up 15.3% over January 2015. Indeed, the CRE market appears to have gained momentum recently, as total sales over the past three months were 22.2% above the prior three months.

The outlook for REITs and commercial real estate depends critically on sustained improvements in economic fundamentals. What are the risks that a recession is on the horizon?

Economic fundamentals for REITs and real estate continue to improve. GDP growth slowed in late 2015, but mainly reflecting a decline in energy exploration and in export markets; domestic sectors supporting real estate remain firm.