RE Recovery Could Last Four More Years

Leading economists and investors say the recovery of the U.S. real estate market could take a few more years, thanks to major demographic trends and cross-border capital flows.

“Lately, when I speak at industry events, there are always two questions I can expect,” says Andrew Nelson, chief economist, U.S., at commercial services firm Colliers International. “First and foremost: where, when, and how much interest rates are moving.” His answers: “Up, soon, and not much. Now property investors are moving on to a more salient question: How much longer can this recovery continue?”

This question becomes particularly salient if you consider economic output figures since the financial crisis. Nelson explains that economic output typically grows by 22.5 percent in real terms during a recovery, but by the end of the first quarter of 2015 real GDP had risen only 13.1 percent. Even the weak growth in Q1 “is consistent with the pattern of this fitful recovery: two or three quarters of moderate-to-strong growth followed by one quarter of subpar growth.

“It’s certainly not time to panic,” he says, adding: “If prior expansions are any indication, there’s plenty more road to run—based on recent growth rates, another three to four years.”

While four more years might be too much to hope for, other market participants believe good performance can extend another two or three years, with the brightest outlook for sectors enjoying tailwinds from major demographic trends and new popularity with foreign capital sources looking for better returns outside the core space.

Robert Stuckey, managing director and the head of U.S. real estate funds at The Carlyle Group, says that the outlook is “selectively positive” for various real estate sectors, adding: “I wouldn’t want to say it’s uniformly a positive scenario for landlords.”

Job creation is expected to decelerate, he says, but thanks to a dearth of construction during the recession and the aging of existing inventory, the overall level of functional obsolescence in U.S. real estate could increase.

“The millennial generation is increasingly affecting preferences in real estate,” Stuckey says. “Multifamily is better positioned than office and industrial, because the millennials are driving demand in that sector.”

All of these demand drivers are also coming at a time of unprecedented cross-border capital flows into the U.S., with foreign buyers drawn to the perceived safety of real estate.

These buyers from outside the country are casting their nets wider, drawn by the transparency and liquidity inherent in the U.S. market, says Lucy Fletcher, managing director of the international capital group at commercial services firm JLL. While there’s still strong interest from major capital sources in top-tier New York office property, she says global buyers—including those from China and other Asian countries—are also looking for opportunities in emerging U.S. gateway markets such as Boston and Chicago.