“The long-awaited self-sustaining recovery may be at hand,” reported international property group Grosvenor in its first quarter North American Research Report. “Economic forces, particularly employment and consumer spending, are beginning to reinforce one another and create a cycle of growth,” said Grosvenor’s Ian Anderson.
“However,” Anderson cautioned, “a lot of the recent growth has been due primarily to government support and policy stimulus. This unusual nature of the recovery’s genesis provides extra reason for caution moving forward. The economy could face new risks when the various stimulus programs end. Further compounding those risks are possible effects of the events in Japan, the Middle East, and North Africa.”
The federal government’s economic stimulus is working, the report notes, including the $600 billion second round of “quantitative easing,” extension of the Bush-era tax cuts, reduction in the employee payroll tax for 2011, and extension of business depreciation incentives. “Our view is that the Federal Reserve has buoyed an unstable U.S. economy by pulling growth forward, elevating growth in the near term,” Anderson went on.
The most important factor in near-term recovery for the U.S., Anderson continued, is expanding employment. With about 140,000 jobs expected to be added each month for the remainder of 2011, the national unemployment rate is expected to drop to nine percent or lower by the end of the year. Job creation will be dampened, however, by anticipated government layoffs.
Along with job growth, consumer activity is rebounding, the report states, driven by an increasingly favorable employment outlook and pent-up demand. Retail sales rose for six consecutive months at the end of 2010, and holiday sales were up almost six percent over the previous year, the best showing since 2004. The optimistic outlook for this sector will be countered, however, by rising gas prices and home values that are still depressed.
The housing market poses a near-term threat to economic growth in 2011, the report contends. Excess inventory and foreclosures have caused housing prices to decline for several months, and prices are expected to go down by another five to ten percent before bottoming out.
Turmoil in the housing market has buoyed another market sector, however: apartments. Multifamily housing transactions are up nearly 100 percent from a year ago, and rental rates are rising. The outlook continues to be sunny for this market sector for a number of reasons. Rental housing supply is very low, with tight financing restricting new construction. Household formation rates will increase, particularly among young adults.
“Changing demographics, lifestyles, and economic trends are colliding to drive demand for rental housing in the U.S.,” noted Robert R. Kilroy, CFA, Managing Director of Grosvenor Investment Management US, Inc. “As construction financing nearly evaporated in 2008-2009, multifamily housing starts plummeted. Now, however, as the economy begins to recover, a tremendous gap between multifamily housing demand and supply has emerged.”
While multifamily housing is the fastest growing real estate market, office and other commercial real estate markets are recovering as well, according to Grosvenor Research. Vacancy rates have peaked and rents (except for retail) have hit bottom. “Banks have acted with restraint in not unloading a turbulent flood of distressed commercial real estate, and this has supported a rebound in the commercial mortgage markets,” Anderson explained. “Nonetheless, significant and increasing amounts of distressed product are coming to the market.”
Distressed real estate is a significant issue in the retail sector, which is lagging behind the rest of the economy in recovery. Most lenders have chosen loan modification rather than disposition to deal with distressed assets, Grosvenor reports. With no substantive increase in consumer spending projected for the remainder of 2011, the sector is expected to continue recovering slowly in comparison with other real estate sectors.