What’s Next for the Economy?

Washington ULI’s 2019 Real Estate Trends conference kicked off with a keynote address by Victor Calanog, Chief Economist and Senior Vice President of REIS. In concert with ULI’s recently released Real Estate Economic Forecast, Calanog predicts “moderate” US economic growth in the near term. Despite 2.9 percent growth in 2018 due primarily to the tax cut, “consensus forecasts suggest that the economy will grow at 2.1 to 2.2 percent in 2019, which has been the compound annual growth rate since the end of the recession in mid-2009,” he stated. “Moderation does not mean contraction,” he went on, “although this rate does render growth vulnerable to shocks or shifts in sentiment.”

Within the big picture, as always, each real estate sector has a different story to tell. While the multifamily sector was the quickest to recover from the recession, vacancy rates have been rising since 2006 and rent growth is slowing down, Calanog said. Record deliveries are driving up vacancy rates in the Washington, DC regional market. “The robust growth in this sector has been fueled by millennials, but I suspect we are seeing the tail end of low home ownership,” he predicted. “Soon the siren song of the suburbs will start, and millennials will start making ‘adulting’ decisions.” On the bright side, however, the generation behind millennials will soon start moving out of their parents’ houses.

In the office market, tenants are reevaluating the need for space. “Back in the day, each employee got an average of 250-300 square feet; now it is 124 SF,” Calanog noted. “There is a huge glut in suburban office space, while WeWork is the largest tenant in top global cities including New York, Shanghai, and London. A collapse of WeWork could contribute to the next downturn.”

But perhaps the weakest sector is retail. “In 1999, experts said that companies could never sell clothing online, but with free shipping and returns, it works,” said Calanog. Due to the impact of online shopping, retail space is being filled with service providers like nail salons, medical clinics, and gyms. Of course, the rise in online shopping has been a boon for warehousing and distribution centers.

Refocusing on the national economy, the REIS economist pointed out that the US has the largest economy in world history. As of 2017, US gross domestic product (GDP) approached 20 trillion dollars. In today’s dollars, the British empire in 1850 generated a mere $13 trillion GDP, while the entire Roman Empire topped out at $60 billion.

“Right now, we are at or near full employment, and these numbers move world markets,” Calanog said. “If this number turns negative for just one month, there is a 25 percent chance that we are already in a recession. If it’s negative for two months, there’s an 85 percent chance that we’re in recession.” Unemployment statistics don’t cause recessions, he explained, but tend to act as the “canary in the coal mine.”

So what could cause the next recession? Unlike in the most recent downturn, the economy has no big asset bubbles. It’s more likely to be a matter of attitudes and expectations, according to Calanog. “All it takes is a ten percent haircut from all of us, and fear of a recession could become a self-fulfilling prophecy.”