July 27, 2018

  • Executive Summary: Gross Domestic Product (GDP) grew at an annualized rate of 4.1% in Q2—the strongest gain since 2014. In addition, Q1 growth was revised upward to 2.2% from 2.0%. Growth was driven by broad gains in consumption, exports, investment and government spending. 
  • Fed Watch: Today’s announcement increases the likelihood that the Fed will raise rates at least two more times this year. We maintain our forecast that the 10-year Treasury rate likely will rise above 3% by year’s end, absent a black swan event. The Fed continues to note its intention to reduce its $4.5 trillion balance sheet. These continuing actions by the Fed have flattened the yield curve over the past year.
  • Policy: Favorable fiscal policy at federal and state levels may continue to drive the unemployment rate lower, leading to further job creation and wage growth. Wage growth, in turn, could induce labor on the sidelines to re-enter the workforce, raising the labor force participation rate. On the other hand, productivity growth remains uneven and low by historical standards. As a result, we believe that inflation will gently pick up, and the risk remains moderately to the upside. As of today, the 10-year Treasury stands slightly under 3%. The 10-year breakeven inflation rate—a measure of markets’ expectation of inflation 10 years from now—hovers just above 2.1%.
  • CRE Implications
    • Retail: Consumption growth and a strong labor market augur well for consumers and retailers in quarters ahead. Retail sales continued to show steady growth in Q2.
    • Office: With the economy operating at or near capacity, employers may find it difficult to fill skilled positions from the current workforce. While an increase in labor force participation would help, growth will be limited by an aging population and other demographics. Likewise, fiscal policy may boost the job market, but gains will likely be modest given that the timing coincides with the economy operating almost at full capacity.
    • Industrial: Potential changes in trade policy appear to be largely rhetorical, which is a positive for industrial real estate. Imports use more space than exports do. With rising personal disposable incomes, consumers may spend more on imports in the months ahead.
    • Multifamily: Demand for apartments remains strong, but supply has gotten ahead of demand for Class A units. Rent growth remains positive for Class B/C units, but Class A rent growth has stalled. Solid economic growth should help renters’ pocketbooks and their ability to pay more. Recent tax reform should benefit the multifamily sector further, as increased standard deductions make renting more attractive for moderate-income households, and decreased mortgage interest deductions make renting more attractive for those earning higher incomes.