Research - FEBRUARY 8, 2019

2019 U.S real estate outlook: U.S. economy to continue supporting demand for real estate

by Jody Barhanovich

UBS has come out with its U.S Real Estate Outlook 2019 report. An overview of the results are as follows:

Economic summary: In 2019, UBS expects growth in the U.S. economy to continue supporting demand for real estate. Even if the pace of growth in real GDP is a little slower than 2018, the momentum is positive and the labor market is strong.

Labor market: Strength in the labor market is an important driver of demand for real estate. In 2018, the United States added an average of 200,000 jobs per month. UBS expects another 2 million jobs, or around 165,000 jobs per month, to be added in 2019. The United States has more job openings than applicants to fill them, a situation that should help maintain real wage growth.

U.S. consumers: 11 years after the start of a global financial crisis, U.S. consumers are optimistic, fueled by a tight labor market, according to UBS. UBS sees consistent growth in consumption — a key component of GDP — and higher retail sales. If interest rates continue to rise, the upside may be limited as rising consumer debt costs and softening housing markets would act as counterweights. Real wage growth offsets some of the impact of higher interest rates. Consumers who expect to be able to maintain employment and enjoy higher wages should be able to absorb slightly higher inflation, including the ability to accept rental rate increases.

Transactions: U.S. transaction markets remain liquid in aggregate, with total sales of individual properties and portfolios at $473 billion for the year ended September 2018. After slowing a bit in 2016 and 2017, sales volume showed signs of leveling off during the first three quarters of 2018, with total volume up by $18 billion compared with the first three quarters of 2017. Broad trends remain similar to recent years, with sales of retail and office properties decreasing and sales of apartments, industrial and hotels increasing.

Commercial real estate debt markets: One reason transaction volume is lower for retail and office properties is lenders have a higher appetite to provide debt for industrial and apartment assets, according to UBS. Real estate debt capital is low cost and generally available but not free-flowing, a situation that arose prior to the previous downturn. On the whole, U.S. debt markets can be described as operational but not excessive, which encourages development but not an abundance of supply.

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