Article by Leslie A. Braunstein published in Urban Land Online, October 18, 2012
Conventional macroeconomics failed to predict the most recent financial crisis and will fail to predict other major economic developments over the next five years, two economists told participants at the ULI Fall Meeting in Denver Oct. 17. To make optimal investment decisions, said Richard Barkham and Eileen Marrinan of Grosvenor Research, it’s necessary to look beyond the numbers to analyze a variety of trends – which can yield surprising results.
Barkham, who directs Grosvenor Group’s global research activities from its London headquarters, noted that despite four years of consistent economic growth since the worst point of the financial crisis, capacity continues to exceed demand throughout the developed countries that belong to the OECD (Organization for Economic Cooperation and Development), and the private sector has not yet “gained traction.”
This situation can be traced, at least in part, to the central banks’ defeat of inflation which ravaged developed countries in the 1970s. Since 1980, he pointed out, long-term interest rates and bond rates have fallen from about 12 percent to below 4 percent, while real estate capitalization rates also have declined.
“The defeat of inflation was a major policy triumph, but central banks took their eyes off the ball,” said Barkham. “They failed to predict the impact of emerging markets. Cheap goods from China helped suppress inflation; cheap capital flooded into bond markets and money markets. Weak regulation allowed excessive bank leveraging and the emergence of a huge shadow banking industry. Monetary stimulus became a panacea, leading to a series of asset bubbles and the buildup of a mountain of debt.”
This situation continues, he said, with the announcement of a third round of quantitative easing, while debt continues to impede interest rate growth. Global real estate capitalization rates remain low by historical comparison, averaging about 6 percent among 70 markets recently surveyed by Grosvenor.
“If macroeconomics doesn’t help us predict the future, what should we look at?” Barkham asked. “Deleveraging is one important factor; we see that the U.S. private sector has made the most progress in this area. Based on its freer markets and entrepreneurial culture, the U.S. economy is reinventing itself, and thus providing better growth prospects as well as slightly higher real estate returns than the other OECD countries.”
As director of research for Grosvenor Americas, Marrinan has studied the U.S. economy in depth and predicts strong economic growth beginning in 2014-15, with the U.S. economy adding about 250,000 jobs per month, before trending downward again in the second half of the decade.
But this growth will occur in some unexpected areas. As explained in her “Worth Watching” article in the September-October print issue of Urban Land, Marrinan expects five sectors to drive economic growth over the next decade: agriculture, energy, manufacturing, trade, technology, and services. To this list she added housing and construction –areas in which recent statistical reports hav far exceeded most economists’ expectations.
“The sectors that drove the U.S. economy prior to the recession favored large metros on the east and west coasts,” she noted. “But these new-growth sectors also will bring benefits to metros in the Southwest, Gulf Coast, and Great Plains.” Houston and Dallas, for example, will capture 60 percent of the new job growth in energy. Grosvenor’s study anticipates a quarter of a million new manufacturing jobs, more than half of which will be in Chicago, Seattle, Los Angeles, Minneapolis, and San Jose.
“The U.S. now has the cheapest energy in the world, and labor costs are much lower than before the recession,” she said. “Both domestic and foreign companies are opening and expanding manufacturing plants in the U.S. China, in contrast, is moving in the opposite direction, with escalating wages and a stabilized, soon-to-decline labor force as a result of their one-child policy.”
The housing and construction industry’s comeback will benefit a wide swath of American metros, Marrinan said: from Los Angeles, Riverside, Orange County, Phoenix, and Denver in the West to Dallas, Houston, Chicago, and Atlanta, as well as northeastern population centers such as Washington, Boston, and New York.