4Q Economic & Real Estate Report
After a difficult start to 2014, the United States (U.S.) economy gained considerable momentum despite a deceleration in GDP during 4Q14. Consumers, businesses and investors showed renewed confidence throughout the year, as stocks repeatedly set new highs, job creation was the strongest it’s been in 15 years, auto sales accelerated, consumer confidence steadily increased and falling oil prices cut the cost of gas to its lowest level since 2009. Most importantly, the U.S. economy continued to show resiliency at a time when financial struggles have negatively affected global economies such as those of China, Japan, Europe, Russia and Latin America.
In October, the Federal Reserve (Fed) announced the end of its bond-buying program, marking the close of a six year effort to stimulate the U.S. economy. This step was taken in recognition of the improvement in the economy and labor market and diminished inflation risk. Over a six-year period, the Fed has bought up approximately $3.5 trillion in assets to keep interest rates low and in order to encourage investment activity. Still, wage growth generally remains sluggish and gains in labor productivity have been slow. As a result, policy makers at the Fed will have to decide when the economy will be positioned to handle rising interest rates. The downward trend in energy prices and lower import costs, which are the result of a strong dollar, have kept inflation below the Fed’s 2.0% target. Among many, it is widely thought that the Fed will start increasing interest rates later in 2015.
Still, numerous potential headwinds loom on the horizon for sustained economic growth. The housing market generally slumped in 2014, manufacturing activity moderated and December retail sales were disappointing. Looking ahead, fundamentals suggest sustained growth in 2015, led by steady consumer spending and business investment; however, economic developments in China, Japan and the Eurozone could negatively impact future growth even though the U.S. is presently outperforming these economies.
A healthy economy, fueled by a labor market recovery and increased consumer spending, has benefitted the commercial real estate industry by driving occupancy gains, rental rate appreciation and more construction activity. Data and analysis from leading real estate firms, data providers and indices continue to suggest strengthening market fundamentals. The NCREIF Property Index reported its 20th consecutive quarter of positive growth in 4Q14 and the simple average overall capitalization rate (comprising the office, retail, apartment and industrial sectors), declined for the11th consecutive quarter as per the 4Q14 PwC Real Estate Investor Survey. Commercial real estate indices produced by Green Street and Moody’s/ RCA have both indicated healthy price appreciation for commercial real estate assets throughout 2014. Investors, trying to capitalize on this wave of positive momentum, increased acquisition volume during the year, helped by the strong availability of capital and attractiveness of property yields in comparison to other asset classes.