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Census Data: National and Local Trends You Need to Watch

Posted on June 3, 2019 by Mike Kushner in Blog, Commercial Real Estate, CPBJ Articles, Local Market, Trends No Comments

Note: This article was published by the Central Penn Business Journal. Click here to read the original version.

Census data provides a fascinating look into population growth trends that stand to have a profound impact on our economy, both locally and nationally. More than just being “interesting” data to study, population growth and decline points us to important trends that will reshape supply and demand in various industries, one of the most prominent being real estate.

Just last month, the US Census Bureau released new population estimates. These estimates account for and compare the resident population for counties between the dates of April 1, 2010 to July 1, 2018. The outcome? There are shifts in population taking place across the nation that may differ from what you might assume. Let’s take a look at some of the highlights from this data from a national and local level.

At a National Level

South and West Lead Population Growth

The census data confirmed that counties with the largest numeric growth are located in the south and the west regions. In fact, Texas claimed four out of the top 10 spots. Looking at population growth by metropolitan area, Dallas-Fort Worth-Arlington, Texas, had the largest numeric growth with a gain of 131,767 people, or 1.8 percent taking place in 2018. Second was Phoenix-Mesa-Scottsdale, Arizona which had an increase of 96,268 people, or 2.0 percent. The cause of growth in these areas is the result of migration, both domestic and international, as well as natural increase. In Dallas, it was natural increase which served as the largest source of population growth, whereas in Phoenix I was migration.

Fastest Growth Occurred Outside of Metropolitan Areas

Surprisingly, no new metro areas moved into the top 10 largest areas. Of the 390 metro areas within the US (including the District of Columbia and Puerto Rico), 102 of these areas, or 26.2 percent experienced population decline in 2018. The five fastest-decreasing metro areas (excluding PR) were Charleston, West Virginia (-1.6 percent); Pine Bluff, Arkansas. (-1.5 percent); Farmington, New Mexico (-1.5 percent); Danville, Illinois (-1.2 percent); and Watertown-Fort Drum, New York (-1.2 percent). The population decreases were primarily due to negative net domestic migration.

North Dakota Claims Fastest Growing County

Among counties with a population of 20,000 or more, Williams County, North Dakota claimed the top spot as the fastest-growing county by percentage. This county increased by 5.9 percent between 2017 and 2018 (from 33,395 to 35,350 people). The rapid growth Williams County experienced was due mainly to net domestic migration, 1,471 people, in 2018. The county also experienced growth between 2017 and 2018 by both natural increase of 427 people, and international migration of 52 people.

More Growth than Decline

Out of 3,142 counties, 1,739 (or 55.3 percent) gained population between 2017 and 2018. Twelve counties (0.4 percent) experienced no change in population, and the remaining 1,391 (or 44.3 percent) lost population. Between 2010 and 2018, a total of 1,481 (or 47.1 percent) counties gained population and 1,661 (or 52.9 percent) lost population. Though there has been more growth than decline overall, the numbers indicate that this can easily shift year over year.

At a Local Level

Dauphin County

Lancaster County

York County

Cumberland County

Cumberland, Dauphin, Lancaster and York Experience Consistent Growth

The most notable trend to take place between 2010 and 2018 in Central PA is that these counties all experienced consistent growth year-over-year. Moreover the growth occurred fairly evenly over the last 8 years. This provides consistency and enables the economy to respond to the growth over a reasonable amount of time.

Counties Also Maintain Same Order of Ranking in Population

Another trend worth noting is that the counties have maintained the same order of ranking based upon population for 8+ years. For example, in 2010 these counties in order of smallest population to largest population was Cumberland, Dauphin, York, Lancaster. This is the same ranking we see in 2018, and every year in between. No county surpassed another at any point.

Lancaster Remains Largest and Fastest Growing County

Lancaster County has a major lead in population over the others. At 984 square miles, it is also the largest of the 4 counties. Between 2010 and 2018 it also experienced the largest numeric growth at 24,112 people. Number two in numeric growth was actually the smallest of the four counties, Cumberland County, which grew by 16,017 people. York County grew by 13,301 people and Dauphin County grew by 8,997 people.

Overall, the latest US Census offers valuable and insightful information related to population growth between 2010 and 2018. Understanding the cause of either growth or decline provides framework for how these shifts may continue on their course, or change in the future.

A deeper dive into the census data reveals several demographic changes impacting commercial real estate development: household formations, aging baby boomers, growing millennials, women in the workforce, and migration toward the South.

Today’s demographic changes present challenges for commercial real estate developers, but they also offer lucrative opportunities to firms creatively adapting to new demands.

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6 Things in 2018 that Should Have Commercial Real Estate Agents Feeling Grateful

Posted on November 28, 2018 by Mike Kushner in CPBJ Articles, In the News No Comments

Note: This article was published by the Central Penn Business Journal. Click here to read the original version.

It’s about that time when people start to reflect upon the last year, making note of progress that has been made, and milestones that have been achieved. In light of the Thanksgiving holiday, there are certain things that should have commercial real estate agents, in particular, feeling grateful for what 2018 has brought with it.

Here’s a look at six things that should have CRE professionals giving extra thanks this year – and looking to 2019 with high expectations.

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Pros and Cons of Crowdfunding and Commercial Real Estate

Posted on November 28, 2018 by Mike Kushner in CPBJ Articles, In the News No Comments

Note: This article was published by the Central Penn Business Journal. Click here to read the original version.

By now you’ve likely heard of the concept of crowdfunding. Maybe you’ve even ran a campaign for yourself or used a crowdfunding platform to give money to a cause.

When most people think of crowdfunding, they think of using it to raise money for charity, like Go Fund Me, or to help grow a business, like Kickstarter. But one sector of crowdfunding that is steadily growing is crowdfunding for commercial real estate investments.

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Pros and Cons of Crowdfunding and Commercial Real Estate

Posted on November 28, 2018 by Mike Kushner in Blog, Commercial Real Estate, CPBJ Articles, Trends No Comments

Note: This article was published by the Central Penn Business Journal. Click here to read the original version.

By now you’ve likely heard of the concept of crowdfunding. Maybe you’ve even ran a campaign for yourself or used a crowdfunding platform to give money to a cause. When most people think of crowdfunding, they think of using it to raise money for charity, like Go Fund Me, or to help grow a business, like Kickstarter. But one sector of crowdfunding that is steadily growing is crowdfunding for commercial real estate investments. It’s exactly what it sounds like. A group (or “crowd”) of fellow CRE investors purchase shares of a property or properties. Their combined resources allow them to jointly own CRE properties that none could afford to invest in individually.

On paper – or should we say on the internet – it’s a seemingly simple concept with obvious benefits. But it’s not without drawbacks too. Next we’re going to take a closer look at the pros and cons of crowdfunding for commercial real estate, and how this investment option may or may not be a good fit for you.

The Pros –

Affordable Price of Entry

Most people don’t have millions of dollars, even a hundred thousand dollars to put into a commercial real estate investment. This obstacle no longer has to stop interested investors from getting in on a great CRE deal. Through crowdfunding, pooling together funds is simple and fast. Commonly the price of entry is anywhere from $1,000 to $5,000. Compare this to outright owning your own investment property and you’ll see that this price of entry makes crowdfunding a really affordable opportunity.

Control of Your Cash

Compared to putting your money in a real estate investment trust (REIT), CRE crowdfunding gives you a lot more control and oversight. You get to choose exactly the type of property you want to invest in; you’re not relying on a trust manager to do this for you. For some investors, they love the thrill of the hunt of doing their own research and finding just the right property to invest in. If this is you, then you’ll enjoy that crowdfunding gives you control over when and how you invest your cash.

Diversity

Having a diverse investment portfolio is important. You want to be sure you’re not betting on just one horse. Through crowdfunding, you can invest in many different CRE properties within different sectors and classes. Even if you only have a moderate amount of money to invest, because the entry price for crowdfunding is so reasonable, this gives you the opportunity to diversify where your money is going.

Stability

No investment is completely stable, but when compared to traditional stocks and bonds, a CRE crowdfunded investment offers more stability because it’s not at the mercy of the stock market. Yes, other factors within the economy will certainly impact the value of the property, among other things; however, this is rarely an overnight change and can usually be predicted well in advance.

The Cons –

Longer-Term Commitment

When using crowdfunding to invest in commercial real estate, you’ll need to abide by your operating agreement. Usually when you invest, you have to lock this in for a set period of time. Sometimes this is several months, other times it’s several years. No matter how you look at it, crowdfunding investments are not easy to liquidate. They take time – and time isn’t always something people have, especially when it locks away cash that could be needed elsewhere.

Little to No Say in the Property

In the pros section we mentioned how CRE Crowdfunding gives you more control; however it’s important to note that really only pertains to your money. When it comes to the actual investment property, you have little to no say in the project. As a smart investor, you should do your homework to be sure you agree with the plans for the property and how it will be managed. Because after you invest, your opinion will most likely not be solicited.

The Unknowns

CRE crowdfunding most certainly has its risks. If you can tolerate these risks, then there is the potential for a high reward. A lot of the risks revolve around the unknown. Will the project stay on budget? Will it be completed on time? Will the property be managed as intended? Will the predictions and assumptions for the investment hold true? If you don’t like the risk and worry of the unknowns, CRE crowdfunding could really weigh you down.

Fees, Fees and More Fees

One final con is that there are a lot of hidden fees that could catch you off guard. The crowdfunding platform itself will apply fees to your investment. This varies from platform to platform, so be sure to read the fine print. Additionally, the investment property may also slap on additional costs for things like a construction fee, management fee, etc. Again, be sure to closely and carefully read every piece of your operating agreement because this is where you should uncover these fees before you sign on the dotted line.

The real takeaway here is that, like anything, crowdfunding for commercial real estate has its ups and downs. A smart investor will closely consider each side and weigh the risk versus the reward. Even with its cons, crowdfunding is a valuable investment opportunity that cannot be ignored, especially if you’re looking for ways to diversify your investment portfolio.

How do you feel about crowdfunding for commercial real estate? Is there something we missed on our list? Share your thoughts by leaving a comment below!

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6 Things in 2018 that Should Have Commercial Real Estate Agents Feeling Grateful

Posted on November 13, 2018 by Mike Kushner in Blog, Commercial Real Estate, CPBJ Articles, Local Market, Trends No Comments

Note: This article was published by the Central Penn Business Journal. Click here to read the original version.

Here’s a look at six things that should have CRE professionals giving extra thanks this year – and looking to 2019 with high expectations.

Interest rates are still historically low.

Yes, interest rates are indeed rising and people are panicking over them reaching 6%, but keep in mind that we are still way below the average rate of the last 47 years at 8.35%. Furthermore, recent gauges of U.S. inflation signify little need for the Fed to change its slow-but-steady stance on interest rate hikes at this juncture, so we don’t expect this to jump up several points overnight. Plus, there are a lot of other factors working in the economy’s favor like…

Unemployment hit a 49-year low.

It’s the headline you’re seeing smattered across every major news publication – the U.S. unemployment rate reached 3.7 percent in September — the lowest it has been since December 1969. What’s more, the job market is so tight that the amount of available jobs far exceeds the number of people seeking employment! Employers reported more than 7 million unfilled jobs in August, the highest level since record-keeping began in 2000.

Demand for industrial space remains strong.

In Central PA, 2018 brought with it an increasing demand for industrial real estate. The third-quarter saw rent grow hit 6.9%. When compared to the historical average of just 1.9%, it’s easy to see how this boom in demand for industrial space is an exciting new trend for our local economy, particularly because we are poised to welcome more and more warehousing and distribution companies to the area.

Sales of multifamily real estate hits record high.

In the third-quarter, multifamily real estate sales set a new record with the all-time high of $160.6 million. This same sector set another record this year in the second-quarter with an all-time low vacancy rate of 4.3%. With just two numbers, 2018 paints the picture of Central PA’s thriving commercial real estate market, particularly in the multifamily sector.

The Fed raised short-term interest rates for a third time this year.

At its September policy-setting meeting, the Federal Reserve raised short-term interest rates for a third time this year. While to some a rate increase may not be something that has you feeling grateful, this is yet one more indication of a healthy, growing economy that can sustain such an increase. Furthermore, forecasters contend that unless inflation picks up or the economy starts slowing, the federal funds rate, which is currently between 2 percent and 2.25 percent, should continue to head higher.

New industries are expanding their commercial real estate.

The sixth and final thing that should have commercial real estate agents feeling grateful this year is healthcare mergers. Why? Because this is shaking up the way healthcare systems are approaching real estate. Across the region, the Commonwealth and nationwide we are seeing mergers taking place between healthcare systems small and large. All of this “teaming up” is causing a change in the way these organizations are using commercial real estate. In some instances, such mergers call for consolidating medical office space to reduce redundancy. In other instances, more space is needed to break into new markets or regions. This burst of acquisitions and activity spurs growth and fuels CRE sales.

Gratitude…and Caution

It’s important to note, this is the highlight reel from 2018. The CRE market has certainly experienced both its ups and downs in the various sectors of retail, office and industrial real estate. What’s most important is to take all good news, and bad news, with a grain of salt and know that what goes up, will eventually come down – whether that’s next quarter, next year or next decade.

For now, we can slide into the holiday season feeling grateful for these “gifts” the market has given us this year and enter 2019 cautiously optimistic.

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Jobs – Not Economy – Drive Commercial Real Estate Activity

Posted on August 22, 2018 by Mike Kushner in CPBJ Articles, In the News No Comments

Note: This article was published by the Central Penn Business Journal. Click here to read the original version.

Earlier this summer, it was reported that the number of Americans filing for unemployment benefits rose less than expected. Dropping unemployment numbers indicate a strong labor market.

Many people may assume that it’s the economy that drives commercial real estate activity, but really it’s jobs. The two are closely correlated, but for several compelling reasons jobs have the greater impact and drive businesses to either expand or contract their commercial space.

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Jobs – Not Economy – Drive Commercial Real Estate Activity

Posted on August 22, 2018 by Mike Kushner in Blog, CPBJ Articles, Trends No Comments

Note: This article was published by the Central Penn Business Journal. Click here to read the original version.

Earlier this month, it was reported that the number of Americans filing for unemployment benefits rose less than expected. To put this into perspective, claims dropped to 208,000 during the week of July 14, which was the lowest it has been since December 1969! After peaking at nearly 300,000 claims in October of 2017, we have seen a mostly steady (with some variation) decline in unemployment claims moving forward.

Dropping unemployment numbers indicate a strong labor market. The United States has an estimated 149 million jobs – 19 million more than it did just nine years ago. When you think about that type of job growth, it’s easy to see how it will have an impact on commercial real estate. To accommodate 19 million more workers, businesses have had to add space. Even for jobs that are run outside of traditional office space, there are still many more that do utilize office, retail or industrial real estate to some capacity.

Source: Bureau of Labor Statistics

It all comes down to people and space.

Economic growth is measured by GDP and can be fueled by any number of factors, most of which won’t have a direct impact on commercial real estate. Businesses can earn more money without necessarily needing to hire more people or move into a different commercial location. Though it’s common that when the economy is growing, the commercial real estate industry becomes more active, the true driving force is jobs.

When businesses need more people, they also need more space to accommodate these people. A business using traditional office space is not likely able to hire more than three or so people before working quarters begin to feel a bit crammed. As a result, they move. It is increasing jobs, not just economy, that spurs new commercial real estate activity.

Change doesn’t happen overnight.

There is somewhat of a long tail on job growth driving commercial real estate activity. It takes time to catch up! When businesses are adding employees, they will usually make their current space “work” for as long as possible and then strategically move into a bigger space when they absolutely must. Conversely, when businesses are forced to lay off employees, they often stay in their current space, even if it means some space goes unused. The reason is it’s easier (and less expensive) to lay off employees as the first means of cutting costs than it is to downsize commercial space.

So, the job growth that we’ve seen over the course of many years is now driving the commercial real estate activity we are seeing today.

Slowing, but not stopping.

Job growth peaked in early 2015, then fell steadily through the end of 2017. Since then we have seen a modest, yet mostly steady increase in recent months. The reality is job growth, at any rate, cannot go on forever. The reason is, at some point, the United States will reach its “full employment” where everyone who wants a job, has a job. The unemployment rate, now at 4%, is about as low as it has been since the late 1960s, almost 50 years ago.

For commercial real estate, the link between job growth and space demand is clear and direct, though there may be lags. There will always be businesses who are looking to change their commercial space. Some will want more space, some will want less. Others will want to move to a newer space or will desire a different location. Businesses will close while others open. And so the cycle continues.

Short-Term Impact

Even with economic growth heating up, commercial real estate investors and property owners should not set their expectations for greater space absorption too high, at least in the short-term. Yes, there will be some pick-up in leasing associated with the spike in GDP growth. However, CRE professionals would be wise to focus more on job growth as the gauge for leasing prospects – and this outlook looks much more moderate because the ranks of unemployed workers available is largely exhausted. Looking at the short-term, we should not anticipate significant growth in property leasing this year. The surging industrial sector is the exception, which is the result of the shift from in-store to online shopping, not jobs.

Do you agree that it’s jobs, not the economy, that has the greater impact on commercial real estate activity? Why or why not? Join in the conversation by leaving a comment below.

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Real Estate Trends to Impact the United States in 2018

Posted on December 27, 2017 by Mike Kushner in Blog, CPBJ Articles, Trends No Comments

Note: This article was published by the Central Penn Business Journal. Click here to read the original version.

Rapid technological advancements and significant demographic shifts significantly influence the real estate industry. These various factors like growing urbanization, longevity of Baby Boomers and differentiated lifestyle patterns of Millennials are changing the way people value real estate. Add into the mix macroeconomic and regulatory developments, and you have the perfect storm for some significant changes to come to the real estate market in 2018.

With the many changes that have already taken place in 2017, many real estate companies find themselves searching for ways in which they can gain a competitive advantage and drive top- and bottom-line growth in the New Year.

To achieve this, we must identify and monitor emerging trends that are likely to impact the economy moving into 2018. Take a look at the top trends that are shaping the U.S. real estate industry right now!

ECONOMIC OUTLOOK: Increasing interest rates could temper growth

Federal Reserve is likely to raise interest rates in the short-to-medium term. Volatile global markets have led to continued low interest rates, but that’s expected to come to an end in 2018. Higher interest rates are likely to increase mortgage costs and could deter real estate investments to some extent.
Gross domestic product growth will likely increase 2.5 percent in 2018. It’s the same as in 2017, but better than the 2.1% growth in 2016. The modest economic improvement could temper the pace of commercial real estate (CRE) transaction activity.
Improving labor markets and household wealth will boost consumer confidence. The U-5 unemployment rate which includes discouraged workers and all other marginally attached is expected to drop under 5 percent. The employment-to-population ratio is projected to peak in 2018, as retiring Baby Boomers may reduce the share of employed.

REGULATORY OUTLOOK: Greater compliance means greater cost

Increased compliance and administration costs will result from the new accounting standards on lease accounting and revenue recognition that will primarily impact real estate investment trusts (REITs) and engineering and construction (E&C) companies.
Risk retention rules will lower issuance of commercial mortgage-backed securities (CMBS). We are also likely to see a reduction in capital availability in secondary and tertiary markets.
The Protecting Americans from Tax Hikes (PATH) Act of 2015 will ease REIT tax provisions and R&D tax credits for E&C companies, while increasing the flexibility to invest in startups for R&D experimentation. However, corporate tax reforms will reduce flexibility for corporations to spin off real estate assets into REIT structures.

DISRUPTIVE TRENDS: These factors are reshaping the face of CRE

Collaboration and Sharing.These sound like two positive trends, right? They certainly are for startups who utilize new platforms and business models like Airbnb or WeWork to reduce their real estate overhead. However, this type of collaboration and sharing of space is disrupting the way organizations lease and use commercial real estate space for their businesses. Traditional CRE companies will need to rethink their approach toward space design, lease administration, and lease duration in order to compete.
CRE data is becoming more ubiquitous and transparent thanks to technological advancements. The traditional brokerage model is being threatened by the increasing ease and efficiency of online leasing. Traditional brokers will need to diversify their services to include consulting and collaboration.
A growing demand for mixed-use developments as consumers prefer to “live, work and play” in proximity. This demand is the result of a shortage of workers with strong STEM skills, rising urbanization and Millennials’ preference for an open and flexible work culture. Companies trying to compete for this type of talent should choose office locations in areas that cater to the living and working environments preferred by their ideal candidates.
Rising demand for fast and convenient online retailing is disrupting the retail and industrial markets. Innovations in speed and mode of delivery (such as same-day delivery and e-lockers) will decrease the demand for large retail and industrial spaces. This trend will also cause a blurring of the lines between these two properties. For example, some retail space could double as fulfillment centers. To stay afloat, retailers will need to try different store formats to appeal to the consumer, while industrial properties should focus on smaller, more flexible spaces located near cities.
A change in how we get around will also change how we use real estate. With each passing year, more and more people rely upon “pay-per-use” vehicles and rideshare platforms like Zipcar, Uber and Lyft. We also get closer to self-driving vehicles. This major disruption to the entire mobility ecosystem will result in fewer people owning and driving their own vehicles, especially in urban areas. This will free up large parking spaces in prime locations that can be put to different uses. Real estate companies should begin to explore ways to reduce and repurpose parking space as a means to generate more income.

Over the course of the next 12 months, the U.S. commercial and residential real estate industry can expect to be hit with various changes and challenges. Some of these changes may have a favorable impact, while others could impose some serious setbacks. For real estate businesses to gain a competitive advantage and drive top- and bottom-line growth in 2018, they should take note of these emerging trends and work on developing a strategy now to react to the changing market, when the time comes.

What real estate trend do you think will have the most significant impact on the United States in 2018? Share your insights by leaving a comment below!

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Current State of the U.S. Economy and Its Impact on Commercial Real Estate – Part II

Posted on December 12, 2017 by Mike Kushner in Blog, Commercial Real Estate, CPBJ Articles, Trends No Comments

Note: This article was published by the Central Penn Business Journal. Click here to read the original version.

Continuing with part II from our series on the health and future of the U.S. economy, we again welcome the knowledge and insight of Robert Calhoun. Robert is the Northeast Regional Economist for CoStar Group where he manages a team of economists and analysts tasked with producing research at a local, regional and national level on commercial real estate, the economy and capital markets.

Let’s now dive into what real estate market participants should be keeping a watchful eye on in 2018 – Be sure to also take a look back at part I from this series which focuses on the U.S. economy as a whole!

Omni: Debt drives real estate markets and there’s a flood of capital in the market right now. Is this a shoe waiting to drop?

I say that all the time: debt drives real estate markets. What you worry about from a capital markets standpoint is that a flood of capital leads to declining underwriting standards, and so far we aren’t seeing anything overly alarming on that front.

There has been some gradual loosening of underwriting standards in the CMBS space, but this has generally been met with demands of higher credit support by the rating agencies. Investors are still doing a good job of differentiating collateral and demanding higher yields for riskier deals. We are seeing a resurgence of CRE CLOs during this cycle, but the structure of these deals are much better than the previous cycle (simpler and easier to understand, more capital in the deals, etc.).

Omni: What is contributing to the widening gap between bid and ask prices in the commercial real estate market right now?

We’ve been watching the staring contest between buyers with dry powder and owners with big gains for some time. While many owners would probably like to take advantage of current valuations and harvest gains at low cap rates, they run the risk of having to redeploy that capital back out into the same market.

Many buyers, despite being flush with cash, are balking at current prices. And the deeper we get into this cycle, the harder it is to make deals pencil by assuming higher rents and higher occupancy into an uncertain future. I would say the widening of bid/ask spreads right now is a healthy thing, further evidence that market participants are staying somewhat disciplined.

A CRE investor has a couple of different dials he can toggle when making investment decisions: risk profile, return requirement, pace of investment. They are choosing to slow their investment pace instead of loosen their risk profile or lower their return requirements.

Omni: From a commercial real estate perspective, what are the most dramatic potential effects that we should brace ourselves for? In terms of the commercial real estate market, what will you be keeping a close eye on in 2018? What will be driving the volatility in 2018?

I’ll echo my comments from before: CRE fundamentals appear solid with no glaring red flags at the national level. The biggest risk to the commercial real estate market would be a sharp rise in interest rates, likely driven by an unforeseen pickup in inflation that causes the Fed to worry that it’s behind the curve. So far, inflation has been very well behaved.

I’ll be keeping a close eye on the unemployment rate and corresponding wage growth. At this stage in the cycle, with labor markets relatively tight, we’ve typically seen wage pressures materialize. As of the Fed’s most recent statement of economic projections, the Committee expects the unemployment rate to be 4.1% at the end of 2018. We are already at 4.1% as of October 2017. If the unemployment rate were to dip below 4.0% and inflation were to begin moving more quickly back toward the Fed’s 2.0% target, that could elicit a faster pace of rate hikes than is currently expected.

Omni: Do you think market participants are factoring the threat from technology into their investment decisions?

Technology is an interesting topic when it comes to commercial real estate. I think many market participants see CRE as an area of the economy that won’t be as easily “disrupted” by technology, but we’re already experiencing disruption! So much ink has been spilled over the Amazon effect on retail that I don’t need to say much here. WeWork and its $20B valuation, whatever you may think of it, is shaking up the office market. Even if a company doesn’t actually use WeWork space when they want to expand, couldn’t they take a page from their playbook and demand a shorter/more flexible lease in a traditional office building? How would that impact office valuations?

Technology like driverless cars won’t change people’s need to live SOMEWHERE, but it might change the shape of cities and neighborhoods, creating winners and losers. Technology is also changing the way investors think about real estate as an asset class. Priceline is currently valued at $84B while Marriott has a market cap of $46B. In that light, which his more valuable: owning the real estate or owning the customer relationship?

I’m hearing more chatter about how artificial intelligence and machine learning can begin to disrupt the CRE lending market, with algorithms taking the place of human underwriters. It’s easy to envision a company like Zillow disintermediating traditional real estate brokers by facilitating peer-to-peer home sales, and that same model could be extended into the commercial real estate market.

To answer your question (finally), I think it’s important for market participants to consider technological threats…but at the same time, nobody does a very good job of predicting an uncertain future! Picking winners and losers will be as challenging as always.

What appears to be most promising for 2018’s commercial real estate market? What is most concerning? Start a conversation by leaving a comment below!

In case you missed it, be sure to check out part I from our interview series with Robert Calhoun. In our first article, Robert shares insights into the health and future of the United States’ economy as a whole.

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Learn more about Robert Calhoun: Robert Calhoun is the Regional Economist covering the northeast for CoStar Group and is based in New York. Mr. Calhoun manages a team of economists and analysts tasked with producing research at a local, regional and national level on commercial real estate, the economy and capital markets.

Before joining CoStar, Mr. Calhoun was a director of research at Annaly Capital Management, the largest publicly traded mortgage real estate investment trust. There he was accountable for the creation of proprietary research on the US economy, monetary policy and the regulatory environment to drive investment decisions across a portfolio of real estate-related assets that at times was larger than $100 billion. Mr. Calhoun graduated from Clemson University with a Masters in economics and a BA in business management. He also holds the Chartered Financial Analyst designation.

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Current State of the U.S. Economy and Its Impact on Commercial Real Estate – Part I

Posted on December 7, 2017 by Mike Kushner in Blog, CPBJ Articles, Trends No Comments

Note: This article was published by the Central Penn Business Journal. Click here to read the original version.

With the GOP’s proposed tax bill on its way to conference committee to reconcile the House and Senate versions, Omni Realty Group chatted with CoStar’s Regional Economist for the northeast, Robert Calhoun, about the state of the U.S. economy.

For more than a decade, Robert has been an influential source of economic analysis as it relates to monetary policy and real estate markets. He manages a team of economists and analysts tasked with producing research at a local, regional and national level on commercial real estate, the economy and capital markets.

Through this two part series, Robert shares a wealth of knowledge and insight in his answers to our questions. Let’s take a look at what we can learn about the current state of our economy and the largest threats and opportunities we might encounter in 2018 – Be sure to stay tuned for part II from this series as we diver deeper into commercial real estate and the economy!

Omni: From your perspective, how has 2017 fared? Is the U.S. economy where you thought it would be?

2017 has been another solid year in this recovery. Through three quarters of 2017, real GDP growth has averaged about 2.2% year-over-year, roughly in line with the average since 2010. We are on pace to add another ~2mm jobs this year, and while the rate of job growth has slowed, it’s impressive that we’re still adding this number of jobs in the 8^th year of a recovery.

The unemployment rate is down to 4.1% as of October 2017, not only a new low for this cycle but the lowest level since 2000. I expected roughly average growth in 2017, as well as a gradual slowdown in job creation, but I didn’t expect the unemployment rate to fall as much as it has. This took the Fed by surprise as well.

At the end of 2016, the Committee projected the unemployment rate to reach 4.5% by the end of 2017, and I think I was also in that camp. The Fed expected to hike the Fed Funds rate 3 times in 2017, and they are on pace to do exactly that. This is notable: 2017 is the first year in this recovery where the Fed was able to hit their goals for the path of the Fed Funds rate.

Omni: What are your thoughts on Jerome Powell [President Donald Trump’s pick to be the 16th chairman of the Federal Reserve]?

In my opinion, what you get with Powell is monetary policy continuity, which is going to be important for a few reasons. 2018 has the potential to be a challenging year, so there is no reason to amplify that by bringing in a new Chair with radically different ideas about how policy should be implemented.

The Fed intends to begin slowly winding down its mortgage and treasury holdings starting in late 2017, and the taper is set to intensify throughout 2018. Markets are unsure how smoothly this will go, so sticking to the status quo should help smooth out potential volatility. Also, the voting composition of the FOMC swings decidedly more hawkish next year. Picking Powell, a centrist who is already well known to market participants, reduces uncertainty about how the Fed will act in 2018.

Omni: What’s the single biggest threat to the U.S. economy right now? Do you see an economic recession coming anytime soon?

While it would be easy to forecast a looming recession just because the expansion is 8 years old, I’ll paraphrase the Chair of the Board of Governors of the Federal Reserve, Janet Yellen: expansions don’t die of old age. I’m not seeing any alarming imbalances as we have in certain past cycles, and monetary policy is still remarkably loose given how deep we are into this recovery. The biggest threat is probably an unexpected revival of inflationary pressures, which would cause the Fed to raise rates faster, and would cause a spike in interest rates that would be damaging to the economy.

Omni: Generally speaking, has increased regulation been a good thing?

Any increase or decrease in regulation has the effect of moving us along the spectrum between ease of doing business and increased stability. I think I can state, without causing much of an uproar, that going too far in either direction is a bad thing.

Prior to the financial crisis, we had probably gone too far in deregulating certain parts of the financial system, so the increase in regulation that followed is no surprise. That being said, we’re already seeing several bipartisan efforts to reduce the strain from increases in regulation. The House recently passed a bill that would “clarify and amend the High Volatility Commercial Real Estate bank capital rule.” Also, Senate Banking Committee Chairman Mike Crapo (R-IA) is working with a handful of Democrats on a bill that would soften some parts of Dodd-Frank that are considered particularly hard on smaller regional and community banks. The government’s take on regulation is always a pendulum.

What particular insights did you find most compelling? Do you agree or disagree with Robert’s viewpoints? Start a conversation by leaving a comment below!

Now that we’ve taken a broad look at the health and future of the U.S. economy, stay tuned for part II of our interview series with Robert Calhoun to learn more specifically about how the economic climate and emerging technology stand to reshape the commercial real estate market in 2018 and beyond!

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