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U.S. property market in latter stages of cycle
Investors - JUNE 15, 2018

U.S. property market in latter stages of cycle

by Loretta Clodfelter

The U.S. property market has entered into a typical late cycle, said Michael Acton, director of research at AEW Capital Management, in a presentation in San Francisco at the beginning of June.

“Nothing is going to get better,” he said, “but nothing is going to get appreciably worse right away.” Commercial property fundamentals are still healthy, but they are currently peaking for this cycle.

Acton noted U.S. economic growth will be constrained in the near term by the lack of slack in the labor force and limited growth in productivity. He also said we are in “uncharted territory” regarding the current extended real estate cycle, as the cycle will be longer than it would have been otherwise with the passage of the Tax Cuts and Jobs Act at the beginning of 2018. The tax cuts and a federal spending increase this year are likely to boost consumption and business investment. He noted U.S. economic growth during the next year or two is expected to be roughly 50 basis points to 70 basis points stronger due to tax cuts and federal spending increases.

It remains unclear what happens when we stimulate an economy already at full employment, noted Acton. Total U.S. debt had been projected to increase by $10 trillion over the next decade even before the tax cuts were passed, and those cuts will add $1.5 trillion to that estimate.

U.S. property markets are largely in supply/demand equilibrium, and NOI growth is unlikely to accelerate from here. Deliveries of new space are peaking in 2018, and the current construction pipeline shows a significant drop-off next year and further into the future as we enter into “an extended equilibrium,” and there is no evidence this will reaccelerate.

According to Acton, property returns going forward will be lower than in the recent past and largely shaped by the degree and speed of any changes in broader interest rates and the credit environment.

 

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