Constance Hunter is the Chief Economist for KPMG LLP. She is a recognized economic thought leader focusing on the global economy and how economic factors impact asset prices and business performance worldwide.
How much runway do you see in the current market for real estate?
The real estate market is closely correlated to GDP cycles. Of course, while location and other specifics matter a great deal, the overall market performance moves in line with the business cycle. That being said, we have what I call a snowflake economy: It is beautiful and perfect, but fragile. We have low inflation, low interest rates, a robust jobs market and supportive global growth. This does not last forever.
Among the things that could bring about the next recession are shortages of labor or other inputs, a rise in inflation and/or higher interest rates. Part of what spurred real estate investment since the crisis has been extremely low interest rates—some investors used real estate to pick up yield. How sensitive the market is to a change in rates is dependent on the level of debt and the amount of pricing power the market has.
What impact are interest rate movements having on the commercial real estate market?
I had a Twitter hashtag —#RatesLowForLongTime—which I started in 2011. I thought I’d have it for a year, maybe two, but it’s a hashtag that’s had a longer shelf life. I think we’re now finally ready to retire it and face the fact that rates will start to go up.
With that said, the CMBS market is still below the peak of $233 billion seen in 2007 when real 10-year yields were about 2.5 percent. Today, real 10-year yields are about 0.4 percent and in 2017 CMBS issuance was $186 billion. So, it would seem there is still some runway, but it is no longer terribly long.
Are you concerned about pending supply/demand imbalances?
On the residential side, in the past year we’ve seen a turnaround in the homeownership rate of the 25-34 cohort, and now they are working more, buying more homes and you’re starting to see a big pickup in the homeownership rate for that cohort. That’s where there’s not much supply on the single-family side. There’s this perception that millennials are more urban, but the data doesn’t show that. It’s only childless, college-educated millennials that are more urban. Most millennials are becoming more suburban because that’s where they can afford to live. In cities that have overbuilt luxury residential real estate, it seems there could be a supply/demand imbalance.
Certainly, there is a supply/demand imbalance in retail. Retail store closings picked up the pace in 2017. Meanwhile mall vacancies, while not quite at the cycle peak of 9.4 percent seen in the third quarter of 2011, are inching higher towards the 9.0 percent vicinity. Some repurposing is occurring in terms of conversion to warehouses, but this is only happening near major metropolitan hubs.
Where does the real estate market go from here?
The real estate market looks healthy, but that does not mean it will not be impacted by the overall economic environment. When the next recession comes, real estate will see the usual knock-on effects within a few quarters.