Navigating the US Economic and Real Estate Transition

This year is set to be a turning point for commercial property markets in the US. A gradual easing in inflationary pressures alongside a steady, if unspectacular, year for GDP and employment growth should help to ease the market through the final leg of the post-COVID adjustment.

We shall delve into four areas which are likely to have a bearing on returns, funding markets and the differing demand by property types.

Can we expect rate cuts in 2024?

Despite current speculations and recent inflation showing a modest re-acceleration, as well as growth in the economy remaining resilient despite higher interest rates, we don’t think it likely that the Fed will refrain from cutting rates until next year.

Global supply chains continue to normalize and remain consistent with ongoing goods price disinflation, at least for the next few months. Commodity prices also seem to have settled at higher levels, implying falling inflation, and although consumer prices are concentrated in the service sector are rising, recent surges in productivity and declining wage growth point to lower services price inflation ahead.

Considering the expectation of returning to 2% inflation, three reasons support the potential for the Fed to cut rates.

Firstly, the time for monetary policy to impact the real economy has lengthened, necessitating prompt easing to prevent further economic slowdown and potential undershooting of the inflation target.

Secondly, even if the Fed reduces rates by 75 basis points this year, monetary policy would remain restrictive, above levels considered neutral. Thirdly, the substantial reduction in fiscal policy stimulus compared to the previous year is anticipated in 2024, potentially facilitating the Fed’s control over inflation.

Can AI lift the long-term outlook?

The US is likely to be at the forefront of adoption of Generative AI, and it will drive a wedge between real estate returns and economic growth. The economic gains will come slowly over the next decade, and it could significantly raise the outlook for US GDP, but this will be driven by productivity rather than employment.

This growth will be accompanied by a reduction in demand for some types of space ¬– most notably office, but also life sciences and manufacturing as these areas have the highest exposure to generative AI.

Is globalisation over?

Although geopolitics may seem somewhat academic in the highly localised world of real estate, the magnitude of changes to domestic and international politics make it a factor shaping the outlook for real estate markets.

US and China decoupling is shaping domestic policies. Regardless of the outcome, the upcoming presidential election is likely to shape US domestic policies (through subsidies or tariffs) to see increased demand for industrial space as it seeks to replace parts of the global supply chain, with foreign investment into US real estate set to remain weak.

Is it a new era for inflation and rates?

A persistently higher inflation regime would have profound impacts on real estate returns as well as other asset classes and the relationships between them. Currently financial markets are pricing in approximately a 30% chance that inflation will still be 3% or above in 5 years’ time but we think those odds are too high because a high proportion of the recent surge in inflation can be explained by excess demand.

But we are more cautious when it comes to the volatility of inflation. The pre-pandemic economy was unusual for its low and stable inflation rate, with the 20 years leading up to the pandemic being the lowest and most stable periods of inflation over the past 700 years. Whilst the simple law of averages would suggest the future is set to be more volatile, geopolitics and the disruptive influence of generative AI also point in that direction. And if we do see more volatility, we expect central banks to react more swiftly to nascent signs of inflation in the future.

The recent collapse of the Baltimore Key Bridge is another reminder of how adverse supply shocks can also become more frequent as narrowing global supply chains place more emphasis on key assets.

The key lesson for real estate markets is that interest rates may be more volatile in the future.

Source: Oxford Economics

House prices overvalued by 10% in richest nations, Oxford economics says

House prices in the richest nations may be overvalued by about 10 per cent after a decade-long boom that’s one of the strongest since 1900, Oxford Economics says.

The British research firm identified the Netherlands, Canada, Sweden, Germany and France as the most risky property markets, basing its findings on long-term trends and price-to-rent ratios. It estimated that values across 14 advanced economies have rise 43 per cent in 10 years.

The current boom is on course to become the second-longest and third-largest in terms of price rises in 120 years, rivaled mainly by the last peak in 2006 right before the global financial crisis.

American homes in April saw the biggest price jump in more than 30 years, while U.K. properties in the same month rose the most in nearly two decades. In both markets, low mortgage rates, strong demand for larger properties in the suburbs and supply shortages have been among the drivers.

Despite smaller growth in the last two months, U.K. average house prices are projected to jump 21 per cent over the next four years, long outlasting a tax break on new property purchases phased out from July, according to real estate broker Savills published earlier this year.

High valuations and continued price inflation raise the prospect of a “big price reversal” further down the line, though slower rises in mortgage credit compared with the lead up to the financial crisis suggests much lower risks of bust, said Adam Slater, an economist at Oxford.

“A key issue for the coming years will be how real rates behave given opposing influences such as demographics, the savings glut, and the possibility of higher inflation,” the report said.

Source: Bloomberg

Oxford Economics sees Philippines growing up to 5 percent this year

Think tank Oxford Economics has raised its Philippine growth forecast for the year, citing a faster-than-expected pace of economic expansion in the third quarter, but it will still fall short of the government’s target.

“We expect the 2023 growth to settle at five percent now,” Oxford Economics economist Makoto Tsuchiya said.

Prior to this revision, the think tank was anticipating the country’s 2023 gross domestic product (GDP) growth to be at 4.5 percent.

The revision comes as the Philippine economy expanded by 5.9 percent in the third quarter, faster than the 4.3 percent growth in the second quarter.

This brought economic growth in the January to September period to 5.5 percent.

Despite the upgraded forecast, Oxford Economics expects the country’s economic growth to remain below the government’s six to seven percent target for this year.

For the fourth quarter, Tsuchiya said the think tank expects GDP growth to moderate and come in at 3.6 percent.

This forecast is lower than the growth needed in the fourth quarter to meet the government’s full-year target.

National Economic and Development Authority Secretary Arsenio Balisacan said the economy would need to post 7.2 percent growth in the fourth quarter to achieve at least the low end of the government’s six to seven percent target for the year.

Tsuchiya said the economy is expected to post slower growth in the fourth quarter from the previous quarter due to weak external demand.

“We expect the external demand to remain subdued as global economy slows,” he said.

While the recent recovery in semiconductor exports looks robust, he said the think tank expects the global chip upcycle to be gradual, which would keep a ceiling on chip exports.

Electronics, which include semiconductors, continue to account for the biggest share in the country’s merchandise exports.

“Domestically, weak external demand and higher interest rates will weigh on private investment, while private consumption will stay tamed amid the need to rebuild savings and lower confidence due to the aforementioned factors,” Tsuchiya said.

Last week, Balisacan said the 7.2 percent growth needed in the fourth quarter to attain the low end of the government’s economic growth target remains doable, citing room to accelerate government spending and the anticipated consumption spending in the Christmas season.

Source: Philstar