By: Jean C. Lema
On November 8th, 2017, the Urban Land Institute New York hosted one of its most anticipated events of the year – 2018 Economic Forecast: A Conversation with Mark Zandi. Members had the opportunity to interact with Moody’s Analytics chief economist and learn about the main commercial real estate headlines to look out for in the upcoming year.
Dr. Zandi opened the event by requesting questions from the audience to gauge the topics dominating the industry. Participants were interested in a wide range of themes, including: the ramifications of the 2016 presidential election, technology’s effect on real estate, rising interest rates, and a synopsis of the current investment cycle. Dr. Zandi believes there are two main reasons to feel optimistic about the current cycle, but also issues a warning about unforeseen events capable of posing a threat to it.
The first reason to be optimistic about the 2018 outlook is that the U.S. economy is fundamentally sound and at full-employment. The economy has entered its ninth year of expansion – the second largest expansion in U.S. history – and undermining it may require a major economic policy change or geopolitical event. The economy will continue to create between 2 and 2.5 million jobs per annum and see a decline in the unemployment rate (reaching a sub 4% rate in the near-term), according to Dr. Zandi. The anticipated job creation and falling unemployment rate will, as a result, lead to stronger wage growth and, more importantly, higher consumer spending (the main driver of the U.S. economy). Dr. Zandi does not foresee a slowdown in the U.S. economy anytime soon.
Secondly, the major global economies are performing well. The global economy has struggled over the past decade, but many of the issues affecting its performance have been rectified. Dr. Zandi reminds the audience how globalized the U.S. economy is, and what occurs abroad really does matters. The U.S. economy drives global trade, and for the first time since the financial crisis, many of the larger economies (U.S, Europe, and China) are growing and expanding, despite dysfunctional economies, such as Venezuela and Syria, and a struggling Brazil. The global forecast is encouraging and Dr. Zandi sees room for improvement.
While a healthy U.S. economy and a growing global economy are reasons to feel bullish about the near future, the real estate industry should closely monitor the geopolitical sphere and the tax reform agenda. Geopolitics is a main concern for Dr. Zandi. Given the current administration and leader, heightened geopolitical risks and tension, such as North Korea and Russia, could disrupt the U.S. economy. Dr. Zandi also believes the current administration will feel political pressure in 2018 to accomplish something prior to the midterm elections. The uncertainty revolving around the tax reform agenda has created confusion. What will Congress do with tax reform? How will it play out? What will the new tax code look like? Dr. Zandi strongly believes tax reform will make a difference on how the economy performs.
To close the event, Dr. Zandi tells the audience he does not believe commercial real estate will be the reason behind the next recession. In his opinion, values have gone up and are due for a correction, but the landscape does not feel speculative, and will remain balanced and healthy. The 2018 real estate outlook appears favorable.