The global economy is currently seeing a divergence between the United States and the rest of the world, as the U.S. economy moves into expansion against a weakening global backdrop.
“The U.S. is one of the few bright spots in the world,” said Mike Acton, managing director of AEW Research, at an AEW research luncheon where he presented the organization’s current research findings and discussed the state of the economy and the property markets.
One of the main themes is that the U.S. economy is accelerating while the European Union, China and Japan are slowing. Acton identified the decoupling in growth, as well as monetary policy, as a reason for the divergence in yields between the two markets.
On the monetary policy front, the Federal Reserve is on track to normalize its monetary policy with the end of quantitative easing and the end of the Fed’s aggressive actions to stabilize the economy by buying up assets. But even as the United States is wrapping up its QE program, the European Central Bank is looking to expand its monetary policy.
Job growth in the United States has also begun to rebound. Employment growth has averaged 1.6 percent annually since February 2010 — higher than the 1.4 percent average annual employment growth experienced during the recovery from the previous recession. But with such a deep trough to overcome — many more jobs were lost in the current cycle than in previous recessions — total employment has only recently climbed higher than the pre-recession employment peak.
However, some markets have seen their employment surge past the pre-recession employment peak. In fact, the top three major markets with strong employment growth are all in Texas: current employment in Austin is 15.2 percent above the pre-recession peak, and employment is 11 percent higher in Houston and 9.3 percent higher in San Antonio.
“All the Texas markets are very strong,” Acton said. “That’s energy and tech.” The energy and high-tech industries have been propelling employment growth across the country, along with the healthcare and housing sectors. He also pointed out that “labor mobility has been much lower in this recovery,” which he attributed to both demographics — the U.S. population as a whole is getting older, and older people tend to be more rooted in place — as well as the prevalence of underwater home mortgages, which prevented people from selling their home and moving to cities with employment growth.
With employment increasing to new highs, Acton emphasized that the commercial real estate industry in the United States is going to have to increase development to meet demand — and rents will need to grow in order for investors to feel comfortable taking on more risk via construction.
Of the four major property types, only the apartment sector currently has rental rates that exceed their previous peak. According to Acton, average apartment rents are at an all-time high. By contrast, office rents are nearly 10 percent below the pre-recession peak, while industrial and retail rents are still down nearly 15 percent.
While construction activity for the apartment sector has bounced back, construction activity for other property types has not increased to pre-crisis levels. The construction pipeline for U.S property pre-crisis was 1.5 percent to 2.0 percent of total stock. Construction of office, retail and industrial property continues to be well less than 1 percent of total stock.
“This isn’t really any construction at all when you get right down to it,” Acton said. He notes that rents will have to rise to a level high enough to support new construction before development will begin to pick up — but there is a pretty strong runway for rental growth.
Loretta Clodfelter is production and copy editor with Institutional Real Estate, Inc.