The FTI Consulting Economic & Real Estate Report - 2nd Quarter 2014

The FTI Consulting Economic & Real Estate Report - 2nd Quarter 2014

Real Estate

September 24, 2014

The U.S. economy continued its improvement at the mid-point of 2014. The second advance GDP estimate showed the economy grew at a 4.2% seasonally adjusted annualized rate during 2Q14, up from a 2.1% contraction recorded during the prior quarter that was primarily due to adverse weather conditions. Accelerated consumer spending and an increase in business investment were primarily drivers of the latest gains since the prior quarter. For the first half of 2014, the economy grew at a 1.0% seasonally adjusted annualized rate.

The Federal Reserve indicated it would scale back its purchases of mortgage and treasury bonds to $25 billion monthly, which is expected to end in October 2014. The latest GDP reading has sparked debate as to when the Federal Reserve should start raising interest rates, but the Federal Reserve commented that that short-term interest rates will stay low for a considerable time after the asset purchase program ends.

Several other economic indicators have given rise to optimism. The labor market has added more than 200,000 jobs for five consecutive months and the unemployment rate declined to its lowest level in nearly six years. Coinciding with the brightening labor market picture, both the Thomson Reuters/University of Michigan Consumer Sentiment Index and the Conference Board Consumer Confidence Index improved during June as consumers were more optimistic regarding economic conditions. Additionally, durable goods orders increased, manufacturing output strengthened and the Leading Economic Index grew stronger. Still, overseas turmoil and a slow housing recovery give rise to concerns.

Steady demand for U.S. commercial real estate assets, the increased availability of capital and a favorable lending environment resulted in market improvement during the first half of 2014. Several leading commercial real estate information providers reported continued recovery characterized by increased absorption, declining vacancies, gradual rental rate growth and more construction activity. The NCREIF Property Index reported its eighteenth consecutive quarter of positive growth in 2Q14 and the simple average overall capitalization rate (comprising the office, retail, apartment and industrial sectors), declined for the ninth consecutive quarter as per the 2Q14 PwC Real Estate Investor Survey. As investors continued to expand their horizons to seek out higher yields, demand to acquire commercial real estate product remained strong during 2Q14. Similar to the prior quarter, investor sentiment and pricing remain positive, which is indicative of a desirable investment climate.

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