Economic & Real Estate Report - 4Q 2015

Real Estate & Infrastructure

February 24, 2016

Amidst headwinds such as economic weakness in China and emerging markets, financial and stock market volatility, falling oil prices and a stronger dollar, the U.S. economy weakened to end 2015. The advance estimate of 4Q15 GDP showed that the U.S. economy grew at a seasonally adjusted annualized rate of 0.7%, as consumers scaled back spending. The struggles of China’s economy, the second largest worldwide, has been a drag on many U.S. companies. In December, factory and manufacturing weakness continued to be weighed down by tepid global demand, triggered by the strong U.S. dollar, which has negatively impacted the sales and profits of U.S. companies with large foreign operations by cutting the dollar value of international revenues and has diminished demand for American exports by effectively raising their prices.

The industrial sector pulled back production for the third straight month, dragged by cutbacks in utilities and mining output, which was driven by cheaper energy prices. Despite these impediments to growth, several economic indicators were encouraging. During 4Q15, leading indices show that consumer confidence increased, the labor market strengthened, as 284,000 jobs were created during the quarter, the best pace all year, and the unemployment rate ended at a yearly low of 5.0%. Driven by steady household formations, a resilient housing market was evidenced by improving builder sentiment, increased sales activity and healthy price appreciation. Additionally, construction activity registered its highest level in eight years during 2015.

In December 2015, the Federal Reserve raised its Federal Funds Rate (25 BPS) for the first time in nine years and hinted at several more increases that could come in 2016. During the past several years, the commercial real estate sector has benefitted from the Fed’s injection of liquidity into the economy, which has helped current pricing for assets in many markets to now exceed their pre-recession levels. Expectations that the Fed will continue to tighten policy and normalize rates, have led to concerns that the higher rates could diminish investor demand for commercial real estate, as other lower risk investments become more attractive; however, many in the real estate industry believe that the increased rates signal an improving economy, which will help support higher rents and property values.

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