1Q Economic & Real Estate Report

Real Estate

May 20, 2015

Reminiscent of patterns during the past several years, U.S. economic activity cooled to begin the year. It is thought that the soft economic data was caused by several factors, including adverse weather in several parts of the country, the lingering effects of West Coast port closures, reduced capital investment spending (particularly by oil companies) and a stronger U.S. dollar. In fact, the 1Q15 9.0% rise in the U.S. dollar against foreign currencies during marked its largest quarterly increase since 3Q08 and boosted the dollar to its highest level in more than a decade. While a stronger dollar makes imports less expensive, domestically produced goods are more expensive overseas, which has contributed to widening the trade gap. Still, most economists believe this 1Q15 weakness is only temporary, as the cold weather and port shutdowns are over and cautious consumers are expected to increase spending activity in the upcoming months.

Although it was thought at the beginning of 2015 that interest rates might be increased by midyear, the Federal Reserve wants more evidence that the economy is stronger in light of the weak advance GDP output and recent labor market struggles before it raises its short-term interest rates.

The U.S. unemployment rate remained steady at 5.5% in March, but the labor force contracted during the month, as only 126,000 jobs were created, which was well below consensus estimates. Still, the Federal Reserve believes that growth will escalate throughout the remainder of the year, noting in April that household incomes and consumer confidence were rising. Recent housing data is supportive of the Federal Reserve’s positive outlook, as household formation increased by 1.5 million during 1Q15 compared to the prior year, which has boosted demand for housing, as evidenced by mortgage applications, which reached a twoyear high.

Despite weak economic growth during 1Q15, sustained demand for U.S. commercial real estate assets has helped the market continue its recovery. Data and analyses from leading real estate firms and data providers indicate improving market fundamentals, such as higher occupancy levels, increasing rental rates, more investment activity and healthy levels of absorption. The simple average overall capitalization rate (comprising the office, retail, apartment and industrial sectors), declined for the 12th consecutive quarter according to the 1Q15 PwC Real Estate Investor Survey. Commercial real estate indices produced by NCREIF, Green Street and Moody’s/RCA continue to indicate healthy price appreciation for commercial real estate assets. Driven by high yields, availability of capital and willingness for risk, investor sales volume bettered totals recorded at this time last year by 47.0%.

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