As President Obama’s time in the White House draws to a close, he hands over a very different economy to the one he inherited in the aftermath of the global financial crisis.
Despite the discord in Washington during the past eight years, the U.S. has seen significant economic improvement. GDP is at its highest rate in real terms ($18.5 trillion), while investment in numerous sectors, from advanced engineering to research and development, has reached record highs and is projected to grow rapidly ahead. Even indicators that haven’t fully rebounded, such as housing starts and wage appreciation, are improving.
It’s not been without its big challenges: Obama’s time in power has been filled with economic ups and downs. But in recent years, success has trounced challenges, says John Sikaitis, Managing Director – Research, Americas. And the U.S. real estate industry has changed significantly as a result.
He gives Real Views a rundown of eight years of Obama and explains priority areas for the incoming President.
How has U.S. real estate changed since 2009?
As the economy has moved from recovery to expansion, the commercial real estate leasing, investment and development markets have shifted considerably. In 2009, leasing activity was slow, availabilities were high, pricing was depressed and sales and construction activity were non-existent across all five major property types.
In 2016, the commercial real estate markets are in a fundamentally different state, with office, industrial, multifamily, retail and lodging exhibiting tightening market fundamentals characterized by occupancy gains, vacancy declines, rent growth, construction groundbreakings and high demand from investors to allocate capital into the commercial real estate sector.
What differences have emerged across the U.S.?
The U.S. has a highly imbalanced real estate sector that has latched onto a number of established and rapidly recovering geographies with strong fundamentals, but has excluded many secondary and tertiary markets – including many in the Rust Belt and Midwest which have struggled, compared to coastal markets, to sustain solid job creation that drives real estate demand.
The performance of top-tier, Skyline properties is one of the leading barometers for the movement of the overall office market, leasing dynamics and investor sentiment. While the Skyline set has posted an 8.5 percent increase in occupancy over the past five years, leading to rent growth of 6.5 percent, many Rust Belt and lagging geographies have seen minimal gains, and in some cases haven’t recovered at all. In Cincinnati, Skyline vacancy has yet to fall below 21 percent despite a previous low of 13.9 percent, resulting in rents declining by 2.3 percent over the past five years. A similar trend in rents has been seen in Cleveland, where rental growth of just 0.2 percent has been recorded over the same time period.
In contrast, Detroit’s urban core, which has responded to sustained revitalization and diversification efforts from a variety of sources, saw Skyline rents rise by 5.3 percent over the same time period.
Which markets have rebounded well from the recession?
Driven by cyclical and high-growth industries, notably tech and energy, markets such as Austin, Nashville, the Bay Area, Denver, Seattle and Houston not only recovered lost jobs faster than the U.S. as a whole, but currently record employment more than 10 percent higher than their peaks during the mid-2000s.
Meanwhile, markets such as Charlotte, Portland and Raleigh-Durham have transitioned to high-value service economies with defined identities and output, resulting in employment being an average of 10.1 percent higher than during the previous cycle.
What has the economic recovery meant for American workers?
Over the course of the current cycle, the U.S. economy has added more than 15 million jobs, up by an additional 4.6 percent compared to its previous peak.
Since 2009 the consumer has rebounded, with consumer confidence levels registering 104.1 points in September, the highest level since August 2007 and double the level of July 2010, as jobs are available and wages have increased annually by more than 2 percent every month since January 2015.
What are some of the big challenges ahead?
A few policy issues are developing bipartisan support, namely infrastructure investment and defense funding. The urgent need to repair and modernize America’s infrastructure will be a critical issue faced by the next administration. Fortunately, models do exist for solving the seemingly daunting challenge in creative ways. Cities like Dallas have shown that smart spending on infrastructure today can benefit everyone in the future.
Due to sequestration, defense budgets dropped by 24 percent from 2010 to 2015. With both Democrats and Republicans pushing for a reinvestment in defense and intelligence through a repeal of all or part of sequestration, commercial real estate markets in Northern Virginia, Baltimore, Hampton Roads and parts of Orlando, San Diego, Los Angeles and Seattle-Bellevue would benefit.
There is also an urgent need to reform and modernize America’s fiscal policies – including making entitlement programs financially solvent and revising the tax code to make the U.S. business climate more competitive – which will be a critical component both for ensuring the long-term strength and stability of the largest economy in the world and positioning the U.S. real estate market to capture enhanced leasing and investor activity through greater corporate and investor confidence.
What can the incoming President learn from the last eight years?
While there has been significant economic improvement over the past eight years, the congressional standstill has deeply impacted legislative activity. Let’s remember one thing: the President can only do so much; it takes the executive and legislative branch working together to implement policies pushed by the president to enact real change and that has not happened in the modern political era. Should the next administration and congress choose to compromise on certain policy initiatives, the economic and commercial real estate forecast would benefit.