CRE Economic Expansion, Job Growth

TD Economics, an affiliate of TD Bank, released a report forecasting a recovery in the housing market that bodes well for continued improvement in U.S. commercial real estate over the next two years.

James Marple, of TD Economics

TD Economics, an affiliate of TD Bank, released a report, which forecasts that recovery in the housing market bodes well for continued improvement in U.S. commercial real estate over the next two years.

“The key difference between the initial recovery in commercial real estate and future growth will be the contribution of interest rates,” James Marple, TD Senior Economist and the study’s author, wrote in the report. “As interest rates rise, the spread between commercial real estate yields and government Treasuries will narrow. Prospects for price growth will then depend on improving economic fundamentals.”

The TD Economics report examined prospects across commercial real estate sectors. Despite challenges such as gradually rising interest rates and government spending cuts, the report reveals the outlook for commercial real estate is positive, mounting an impressive comeback that began in January 2010, with prices rebounding approximately 30 percent.

The report does say that rising interest rates will make for a more challenging environment for commercial real estate over the next several years, but the industry is ready for it because of the resurgent housing market.

“Rising interest rates are manageable as long as they are caused by faster economic growth,” Marple said. “This is exactly what we anticipate.”

According to the report, the ‘onshoring’ trend in manufacturing, driven in part by low energy costs due to the shale gas revolution, will increase demand for industrial space. This is especially true in coastal markets that are more exposed to foreign trade.

It predicts that U.S. exports are likely to be one of the largest components of overall economic growth over the next several years. Meanwhile, the industrial sector will benefit from an expanding manufacturing sector and increased international trade, especially with South and Central America.

For those concerned about the sequestration, Marple said it will slow demand for office space over the next year, but as the drag lifts, the sector will be supported by accelerated employment growth. Scientific and technical services will also help office employment continue to perform well and drive demand for this space.

The report further forecasts that the apartment sector will see continued demand from renter households that will support ongoing growth in construction.

According to Marple, the U.S. economy is expected to grow by 1.9 percent in 2013 and accelerate to 2.8 percent in 2014. This growth will spur the creation of 4.8 million jobs over the next two years. As job growth accelerates, so too will demand for commercial real estate, leading to continued improvement in vacancy rates.