November 1, 2016
A great deal of confusion exists concerning the current state of the U.S. economy. “Economic Myth Busters,” at the recent Urban Land Institute (ULI) fall 2016 conference, attempted to shed some clarity on what’s going on, as moderator Collette English Dixon with Libra Investment talked to real estate economists Ben Breslau (with JLL) and Joshua Scoville (Hines) about the current economic situation, the outlook, and how it all would impact commercial real estate.
The first myth to be burst is that the current economy is at a tipping point. “The headlines have been as unsettling as I can remember in a stretch,” Breslau said. Concerns about China’s economy, fluctuating oil prices, last year’s Federal Reserve interest rate hike and Brexit, has been enough to push the almost-panic button. “Now we’re coming up on an election, and if all of that wasn’t enough, most of the world’s sovereign bonds are in negative territory,” Breslau said.
The good news? It’s all mostly noise. “Our view is that this (U.S.) growth cycle will last 3-4 years rather than one or two years. Recovery after balance-sheet recessions are slower and take a lot longer,” Breslau said. Another piece of good news is that the United States is primarily a domestic economy. “We’re getting a pretty good tail wind from the consumer side, even though business investment is struggling,” he said.
Scoville indicated that slow growth on the corporate side won’t be too long, either. Scoville also busted myth number two: That rent growth, occupancy and job growth matter when it comes to real estate investments. These metrics, he said, have little correlation to future price growth.
Instead, he relies on a price-growth model, which relies on inputs such as market price (relative to intrinsic value) and cap rate spreads over treasury rates. “The reason why I created a price-based model for this was because we were wrong during the recession,” Scoville said. “We expected to lose a million jobs. We ended up losing nine million jobs. Economic forecasts, when you need them to be good, they can fail you.” The price-based model prevents panic decisions, and forces more discipline in following cycles, he noted.
And though his reasoning is different from that of Breslau’s, Scoville doesn’t see a recession in the immediate future, either. Though China’s economic situation and potential global impact bear watching, Scoville noted that recessions take place to correct imbalances and “I don’t see huge imbalances, relative to pricing, like we had in 2006.”
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