Economic & Real Estate Report 1Q 2017 | FTI Consulting

Economic & Real Estate Report - 1Q 2017

Real Estate

June 14, 2017

Reflecting a continuing pattern of sluggish first quarter economic growth, which has been evident the past several years, the advance estimate of 1Q17 GDP registered its lowest level in three years, as consumers pulled back sharply on spending. Softness in automobile sales and cheaper gasoline prices has negatively impacted retail sales since the end of 2016. Despite the slowdown, March’s continued rise in consumer confidence may signal an uptick in spending in the upcoming months. Other economic indicators were indicative of more cautious optimism. The ISM manufacturing and non‐manufacturing headline indices declined slightly in March, but both signaled an expanding economy. Although factory and durable goods orders increased in March, both readings fell short of economist expectations. Robust job gains in January and February were followed by a sizeable decline in March, despite which, the employment rate fell to its lowest level in nearly 10 years.

At its March Federal Open Market Committee (FOMC) meeting, the Federal Reserve (Fed) raised its benchmark interest rate by 25 basis points (BPS) to a range between 0.75% and 1.0%. This marked the second 25 basis point (BP) increase in three months, as the Fed voiced confidence that U.S. economic growth was progressing “nicely”. The Fed left its plan for further interest rate increases mostly unchanged from its prior meeting and expects a total of three rate hikes during 2017. Fed officials also projected economic growth of 2.1% and a slight uptick in inflation to 1.9% for 2017, which is just under the Fed’s 2.0% target.

Despite healthy commercial real estate (CRE) market fundamentals, a more cautious investment climate resulted in a YoY decline in sales activity. Data from leading real estate indices were also indicative of variances in CRE pricing trends. NCREIF and the Green Street Commercial Property Price Index both reflected moderation in pricing during 1Q17 and slowing growth over the past year. Conversely, the CoStar Commercial Repeat-Sale Indices National Composite Price Index reported a bifurcation in values, as larger property asset sales in core markets declined (2.8%) in comparison to gains (+4.8%) for lower‐priced property sales in secondary markets. The headline Moody’s/Real Capital Analytics (RCA) Commercial Price Index reported an increase in pricing during 1Q17 following a loss during the same period last year.

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