Commercial Real Estate In The Next Decade – Politics & Economics

Posted By CIMLS Staff on Jan. 19 2020 at 3:07 PM EST
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Commercial Real Estate in the Next Decade – Politics & EconomicsThe 2020 decade is beginning with commercial real estate in an upswing, but to answer the question of how the next decade will unfold, our crystal ball is not as clear! So let’s look at two mega trends and do our best to predict what lies ahead-- assuming no black swan crosses our path.

World politics has taken a turn towards nationalism and strong-man leaders. You can see this trend in election outcomes in the US, UK, China, Russia, Turkey and others. This is decidedly an inflection point from the globalism and democracy that began after WWII and accelerated in the 1990’s through 2010. In the near term, business growth, and consequently commercial real estate, has benefited; and we expect this trend to continue at least until 2024.

Interest rates continue to be at historical low levels. Growth in asset prices and income continues to be attractive in real estate due to record low interest levels accompanied by high employment in the US. Although sporadically reported, US deficit spending is at a historical high which places the US economy at risk. There appears to be a positive outcome in the near term, so long as the world views the US dollar as reliable and a safe place to invest. Currently, the US dollar and treasury papers are top of most international investors list when it comes to investing cash for safety and stability. However, the following factors could place this standing in jeopardy:

1) The US debt level is now at 23 Trillion dollars and growing faster each subsequent year! What this means is that the debt level has surpassed 100% of GDP (Gross Domestic Product), every American owes more than $69,000, or in other words, every US tax payer owes more than $207,000.

2) Meanwhile, the Chinese government is using their economic success and standing in the world in order to position the Yuan as a competing currency alongside the US dollar.

So the biggest shock to the US economy can come from the the risk of the US dollar being displaced as the go to currency for the world, resulting in the cost of funding US Debt increasing dramatically. Under this condition, funding for all other economic activities in the US will be under increasing pressure. We do not expect this situation in the next decade but it will be a real possibility in 2030 decade assuming the US policies are not changed to control deficit spending.

The trend in the interim, while Republicans have control of presidency and senate, the easing monetary policy and low interest rate is expected to continue so the real estate market should continue growing.

In summary, there are a couple of long-term risks that could derail the economy and real estate market. We forecast that multifamily, office, retail, industrial and other commercial real estate assets will perform well in the next decade. But expect a lower level of return compared with the 2010 decade which started at post recession levels.