Economy Watch: Industrial Emerges as Strongest Asset Class
- Oct 28, 2016
A near-term U.S. recession isn’t being widely predicted, but institutions appear to be preparing for eventual cyclical weakness, according to Emerging Trends in Real Estate 2017, a report recently released by PricewaterhouseCoopers and ULI. The current business cycle is already the fourth-longest in U.S. history (87 months as of October), far longer than the average 58-month upturns since World War II, the report noted, though averages are of little help in understanding business cycle duration. Cycles have been lengthening over the past half-century, and both the 1980s and 1990s saw growth phases of 92 and 120 months, respectively.
The report also examined trends in various commercial real estate sectors. Industrial, it said, rates well now, since it typically performs well during economic slowdowns. PWC and ULI rated industrial the best opportunity for investment and development going into 2017. The advantages of industrial include continued strong demand drivers, restrained construction and lower perceived risk. Strong locations in growing metro areas are typically supply constrained.
Most investors continue to favor apartments as a relatively safe investment in a possible downturn. A number of factors account for the enduring strength of the sector: entry into the job market of the massive Millennial generation, who are a prime age cohort for rentals; consumers’ lingering wariness of for-sale housing product following the housing market crash of 2008; and credit issues for consumers, compounded by student debt and tightened bank requirements for home mortgages.
The office sector is less in favor with U.S. institutions, which see it performing badly in economic contractions and its high sensitivity to job numbers. The report also posited that the retail sector now has two principal types of investors: those who have deep experience and those who tend to react to headlines. The former find it a promising sector for 2017. The latter are net sellers.