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Across the United States, commercial real estate is changing. More people are seeing the economic recovery, and positive sentiment is spreading. Let’s take a close look at where we are in the nation’s economic recovery.
Real GDP and per capita real GDP have managed to exceed their pre-recession levels. But don’t be misled. The U.S. economy still remains nearly 14 percent below its long-term trend real GDP, which is over $2.3 trillion. To put this into its proper perspective, that’s about $7,130 per capita, which outstrips the entire GDP of countries like Russia and Italy.
The forecast for job growth tells a similar economic recovery story, but it’s one that’s more promising. NAI Global predicts that more than 2.5 million jobs will be added this year nationwide, and a 1.9 percent increase is expected every year until 2018.
Because there is a significant historical relationship between employment growth and commercial property vacancy rates, the United States will need to add at least 12 million jobs by 2018 to realize any noticeable decline in vacancy rates across all property sectors. Of the 8.7 million jobs lost during the recession, the United States had regained 112 percent by September 2014. However, the economy still remains 19.3 million jobs below trend. That leaves a lot of room for growth.
Aggregate commercial construction activity has improved 62 percent since the market hit rock bottom but still remains 15 percent below normal levels. This might begin to improve as banks continue to loosen their standards and move away from an unprecedented lending capacity of about $20 trillion.
Commercial real estate experts are expecting a new wave of construction and mortgage lending. That prediction is especially significant when you consider that housing and related services combined compose about 18 percent of the country’s total GDP.
The flow of mortgage funds is what typically drives cap rates. As for the future of mortgage flow, the Fed has been contributing $480 billion per year into money center banks since 2008. As the economy steadily improves, major banks are starting to increase their lending activity significantly.
Even though commercial real estate loans have only increased 2.4 percent from their 2011 low, we view this as a precursor to the explosion of lending that could occur over the course of the next five years as banks seek to profit from the near $3 trillion “gift” they received from the federal government.
While the U.S. economy is limping along toward recovery, let’s compare that to other global regions. European commercial real estate growth has been flat and is expected to remain that way for a few years to come.
Markets in Asia continued to see growth through the close of last year, but that growth is slow.
Latin America is enduring a declining market.
In the United States, we’re fighting an uphill battle and will continue to do so across the nation for the next few years. But on a local level, we see promising trends.
2008 ushered in a period of economic stress. The commercial real estate market in the Central Valley was hit especially hard because it has relied heavily on overflow from the neighboring Bay Area economy.
While our region is at the tail end of the nation’s economic recovery, we have already begun to see the improved economy raise commercial real estate values. Although the economic hardships we are recovering from in the Central Valley have dampened investor enthusiasm for our region, 2015 will continue to see increased interest from investors.
The national trends supporting recovery will further increase leasing and sale activity in the Central Valley as the nation creeps back toward our long-term historical growth levels.