What’s on tap for the economy and real estate in 2016

Here is one view of the economy in 2016.

The economic expansion will continue in 2016.

More than ever, the ability to thrive through the coming economic cycle will require acute sensitivity to consumer and business preferences for specific real estate product features, amenities, and services. These must vary to reflect the unique economic, demographic, and cultural make-up of the geographic markets where they are located.

Macro-economic outlook

The Federal Reserve will raise the federal funds rate. However, with limited-to-no inflation pressures and low rates of labor force participation, interest rate increases will be small and gradual. Challenging economic and political conditions in emerging markets and the slowdown in China, combined with the high dollar value, will constrain the performance of U.S. exporters. The trade deficit will widen accordingly. Global economic weakness and political turmoil will increase the appeal of the United States as a safe haven, which will support domestic real estate asset prices.

Current business expansion in the United States will be maintained through 2016 due to increases in household formations, continued recovery from the housing market collapse, the “consumer dividend” from low oil prices, growth in housing development and investment in existing housing, and improving labor markets (including small wage rate growth).

Real estate outlook

Apartment: 2016 will be another positive year for apartment investment and development, though in select markets, apartment developers will need to carefully monitor increases in unit supply to avoid overbuilding. The primary reasons for the positive outlook are due to demographic- and behavior-driven factors: the deferral of marriage; overhang of student debt; high cost of for-sale housing in preferred urban coastal and major metro markets; and because highly educated millennials comprise the largest population category.

The type and scale of apartment projects and amenity/service packages (including arrangements for delivery of e-commerce packages and food, bicycle storage, car sharing, and areas for pets) that will be most market-responsive will vary by geographic market and the specific demographic segments present.

Industrial: Development and investment of industrial space will continue to benefit from a variety of factors, including a major shift toward smaller, “last mile” distribution centers in or near major cities, and fewer but larger, highly automated distribution facilities as e-commerce continues to grow. Growth in manufacturing and distribution of building/housing materials will also support the demand for industrial space.

Retail: Low gasoline prices will benefit restaurants, entertainment venues, and car and truck sales. Consumer services – including spas, health and fitness services, and pet care – will help offset the decline of brick-and-mortar tenants due to an increasing share of consumer retail expenditures made online.

Office: Selective office space development and investment opportunities will continue in amenity-laden, transportation-supportive, mixed-use environments. Demand for office space in urban markets to which talent is migrating will rise as employment continues to grow in technology, professional, technical, and business services. “18-hour” cities with strong educational and healthcare bases offering economic opportunities, affordable housing, and high quality of life represent the other type of markets best positioned to hold their strength through this cycle.

Hotel: Turmoil in some foreign markets will cause more U.S. leisure travelers to vacation domestically. Additionally, foreign investors, especially Asian, will buy U.S. hotel properties in gateway and major metro markets.

Thriving through the economic cycle

A variety of risks, including political uncertainty, heavily indebted foreign borrowers in U.S. dollars, and social and political disorder in some foreign countries, could interact to curtail U.S. economic expansion. In some fast-growing regions which were the first to recover from the Great Recession, expansion is in the “late innings.” Many cities not located in gateway or major metro markets that haven’t capitalized on the digital economy can still find opportunities to accelerate growth. Investors and developers will thrive through the economic cycle by anticipating and serving the rapidly changing tastes, priorities, and preferences of diverse populations and demanding businesses, which must constantly innovate to stay ahead of their competitors.

Aaron N. Gruen is a principal with the urban economics, market research, land use policy, and pre-development consulting firm Gruen Gruen + Associates with offices in San Francisco, Denver, and Deerfield, Illinois. www.ggassoc.com

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