3Q Economic & Real Estate Report

3Q Economic & Real Estate Report

Real Estate & Infrastructure

December 17, 2014

Momentum continued throughout the summer months as the second estimate of GDP showed that the U.S. economy grew at an upwardly adjusted 3.9% annualized rate, marking the strongest six month period of growth in more than a decade. GDP growth during 3Q14 was primarily broad-based across most economic segments, including business investment, trade, consumer spending, housing and government. This brisk economic growth pace could raise expectations that the Federal Reserve will start raising its short-term interest rate, which has been at record lows near zero for six years, sometime in mid-2015.

Other economic indicators point to continued economic strength. The labor market added nearly 224,000 jobs per month during 3Q14 and the unemployment rate declined to its lowest level since 2008. Resulting from an improving labor market, U.S. consumer sentiment reached its highest reading in September since July 2013 as per the Thomson Reuters/University of Michigan Consumer Sentiment Index. Additionally, manufacturing output remained solid and the Leading Economic Index grew stronger.

Still, numerous potential headwinds loom on the horizon for sustained economic growth. The Conference Board’s consumer-confidence reading fell sharply in September from a post-recession peak the prior month and the global economy has darkened since midsummer as unstable financial markets, the spread of the Ebola virus and deepening conflict in the Middle East are now weighing increasingly on consumers, businesses and investors. Additionally, there have been economic slowdowns in both Europe and China.

Sustained demand for U.S. commercial real estate assets continued during 3Q14. Several leading commercial real estate information providers reported improving market fundamentals, illustrated by increased absorption, declining vacancies, rental rate growth and more development activity. The NCREIF Property Index reported its nineteenth consecutive quarter of positive growth in 3Q14 and the simple average overall capitalization rate (comprising the office, retail, apartment and industrial sectors), declined for the tenth consecutive quarter as per the 3Q14 PwC Real Estate Investor Survey. Increasing competition amongst investors to find the highest yields within primary and secondary markets drove commercial real estate activity during 3Q14 amidst the extensive availability of financing through domestic and international sources.


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