U.S. MarketFlash | Economic Watch: GDP Growth Falls Below Consensus; Higher Interest Rates in 2017 Still Likely
January 27, 2017
Executive Summary: Preliminary Gross Domestic Product (GDP) figures for Q4 2016 indicate that the U.S. economy grew by 1.9% at an annualized rate. This preliminary figure fell below consensus opinion of 2.2%. Real GDP rose 1.6% in 2016 compared with 2.6% in 2015, marking the weakest year since 2011.
Fed Watch: Q4 2016 GDP growth slowed from the third quarter’s strong gain. Combined with slowing core inflation (the core PCE price index rose only 1.3% in Q4, down from 1.7% in Q3), this lower level of economic growth modestly decreases the odds of rapid Fed interest rate increases. Given increased growth expectations and strong wage inflation in 2017, three Fed Funds Rate increases in 2017 appear most likely, barring an unexpected economic shock.
Interest Rate Impact on CRE: As noted in a recent CBRE MarketFlash, the spike in interest rates since the Nov. 8 election has had modest impact on CRE pricing—an approximate 3% decrease in value for about only 30% of transactions to date. Higher interest rates will put more pressure on cap rates, but stronger growth expectations from the new administration’s policies will offset their rise if those policies stimulate more tenant demand. Industrial real estate is best poised to weather interest rate increases, with strong rent growth expectations.
Diversified Growth. The increase in real GDP included contributions from almost all areas—consumption, housing, inventories, business investment and state and local government spending.
Business Spending. A 1.0% increase in inventories in Q4 shows that businesses are confident the economy will continue to grow at sustainable rate.
Consumer Strength. Though personal consumption expenditures and personal disposable income grew more slowly in Q4, growth in real wages by more than 2% bodes well for consumption going forward.
Consumer Confidence. The January 2017 University of Michigan Consumer Confidence Index rose to its highest level in 12 years.
Single-Family Strength. Residential real estate investment increased by 10.2% in Q4, as total housing starts capped off the strongest year since 2007. Multifamily has been the primary driver in residential construction.
Strong Dollar Impacted Trade. The deceleration in growth was caused by a slowdown in exports, an increase in imports and lower federal spending. Exports fell by 4.3% in Q4, since the Q3 number was inflated by a one-off jump in soybean exports.
Trade Protectionism. The higher trade deficit may increase the risk of more restrictive trade policies from the new administration. Such policies could lead to inflationary pressures and higher interest rates.
Retail: Strong wage growth and consumer confidence will continue to drive improved retail sales. The tightening of monetary policy will place upward pressure on the U.S. dollar, which may impact tourism and luxury-goods consumption.
Retail Investor Sentiment: There has been a lot of negative sentiment recently about retail, which we believe is misplaced. While there is clear weakness in Class B and C malls, this does not extend to the broader retail asset class that had a very strong 2016 and has strong rent growth prospects for 2017 (see CBRE’s Q4 2016 Retail MarketView Snapshot).
Office: Increased growth expectations for 2017 and 2018 may stimulate additional occupier demand. However, the growing skills mismatch in the U.S. labor force will likely result in slower employment growth in 2017, which may temper the scope of any growth.
Industrial: 2016 was a strong year for industrial real estate, and the market remains well-positioned. Technology continues to generate growing demand, but performance may be impacted by U.S. trade policy as imports are generally a better indicator of demand than exports.
Multifamily: The tight labor market is boosting wages and could bring more people into the workforce, particularly millennials who favor renting over owning their homes. Though we are late in the cycle and are seeing softening of rent growth, limited affordable single-family construction is expected to funnel more demand to multifamily.