2Q Economic & Real Estate Report

Real Estate & Infrastructure

August 19, 2015

In a familiar pattern, economic growth was sluggish at the onset of the year and then accelerated during the spring months. Recent growth was driven by increased consumer and government spending and sustained residential investment. Still, the further fall in oil and commodity prices along with a strong dollar are reasons for concerns regarding future U.S. economic growth.

On the positive, it appears that the U.S. economy has moved beyond headwinds experienced earlier in the year such as inclement weather and port delays. As consumer confidence continued to rise, household formation has increased. During 2Q15, annualized household formations averaged 2.2 million, up considerably from the 449,000 annualized pace set at this time last year. This occurrence has helped housing market fundamentals, which improved during the spring months, characterized by rising home sales, prices and starts.

New jobs continued to be added to the U.S. economy during 2Q15. In total, 664,000 jobs were generated during this period, up 13.0% from the prior quarter, and the unemployment rate fell to its lowest level since April 2008. Of concern, the labor force shrank during June, the labor force participation rate remained at historically low levels and wage growth was still considered sluggish by most economists.

Information from the latest Federal Reserve Open Market Committee indicated that the U.S. economy is making progress, noting continued improvement in the housing sector and moderate household spending growth. Recent reports speculate that the Fed could raise (short term) interest rates as early as September, which would mark the first such increase since 2006.

Fundamentals have continued to improve within the major commercial real estate property sectors since 2014 as the latest market data and commentary from leading real estate brokerage firms and data providers report falling vacancy rates, growing absorption, steady rental rate appreciation and more investment activity. The simple average overall capitalization rate (comprising the office, retail, apartment and industrial sectors), declined for the 13th consecutive quarter according to the 2Q15 PwC Real Estate Investor Survey. Commercial real estate indices produced by NCREIF, Moody’s/RCA and Green Street continue to show healthy price appreciation for commercial real estate assets. Driven by high yields, availability of capital and willingness for risk, investor sales volume bettered totals recorded at this time last year by 38.0%.

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