Real estate economist Hugh F. Kelly, PhD, CRE, opened his 20th annual presentation to CREW-Miami with the observation that forecasters should have learned some humility after the inaccuracy of many of their 2016 predictions. That said, he projects moderate acceleration for GDP in 2017, sees the economy as doing well now, and expects continued prosperity for Miami real estate. “Contrary to popular belief, a change in the presidency does not usually mean major changes in the economy, because the economy is cyclical, regardless of who is in office.”
Forecasters use data gathered in the past, but he sees a positive future in statistics that show 2016’s commercial real estate transactions down by 15 percent. “That indicates the absence of a real estate bubble. Investors looked to fundamentals last year and took a more disciplined look at principles they tend to forget in boom times.” He expects a recession in 2019, however, based on where we are in the cycle. “Fiscal stimulus in a tight labor market, prompting monetary tightening, is a classic prescription for a recession within two years.”
In the short term, he expects advances in industries related to defense and infrastructure, with activity favoring those along the East and West coasts; the country’s midsection will do less well than its edges. Some growth is also a likely result of the effects of promised tax cuts and deregulation.
When it comes to trade, he believes the US is a net beneficiary of the global economy because “we benefit, whether goods go in or out.” The open movement of goods and capital happens most in California, New York, Texas, Michigan and Florida, he noted, adding that “a healthy, prosperous Mexican economy is the best situation for our country’s security.”
With the US population projected to reach 400 million by 2050, this bodes well for the building industry. Shifts in the geographical location of jobs will translate to a need for housing, because housing demand follows economic demand. But we can’t predict the future, so his strategy would be to concentrate where demand exists now, and that’s in the middle, not in high end or low end markets. “Plan now to reach the growing middle market. Profit made by the user is what pays the rent, and that creates the kind of sustainable tax base that attracts people.” He believes a sound economic development strategy lies not in the lowest cost of doing business, but rather in what makes the most profit: cities with highest taxes also have the highest capital inflows and the highest investor returns over time.
Regarding potential restriction of capital, goods, and people moving across borders, Kelly sees no way to stop the influx of capital. “Flight capital continues to see safety in the US. Foreign investment usually has a 10-year lifespan, and is not significantly affected by changes in the US’s administration.” He noted that the US is one of the few countries still growing in population, and that this is a strength that stems from immigration.
Kelly sees the real estate outlook as benign in the short run, commenting that “with elections over, the uncertainty of the campaign years will be replaced by investor confidence. But income returns will dominate, as prospects for appreciation soften.”
Here are his considered projections for specific real estate sectors:
- Miami ranks high among cities with potential value increases in CBD office space. “Offices are not going away because this property type serves a need. Occupied office space has grown to 500 million square feet in the last 15 years, with investors putting in $145 billion last year alone; 90 million square feet are under construction.” His observation is that when office-based activities are profitable, rents rise, reflecting increased corporate profits. Miami’s office rents are already in line (or soon will be) with those in New York, Boston, San Francisco, and Seattle.
- Retail as a property type is hollowing out in the middle, as the strong get stronger and the weak get weaker. Nationally, Miami ranks 12th in retail transaction volume, and has some of the country’s best mall rents, but that cycle is maturing.
- Industrial looks very good in an income-oriented investment environment. “Depending on trade and international volatility, Miami should see value growth—meaning this may be the time to reap profits.
- Multifamily still offers powerful reasons to believe in, but the risk of over-ebullience is highest in this sector.
- Housing is still suffering, with ownership at 63.5 percent (down from 69 percent) and likely to decline further. Causes are the overhang of bad credit from the last recession and students with too much debt to buy. Housing starts will remain below average because construction workers are scarce, and higher interest rates will dim home sales.
Kelly predicts that economic policies being crafted now are likely to have major effects in two or three years, but we don’t yet know what they are. That’s why he advises real estate professionals to imitate chess players and think two or three moves ahead. “Plan for what can happen, not what you think will happen.” His advice is to keep an open mind, stay nimble, and keep learning, because “messiness and problems are the impetus to innovation.”
– Susan Cumins, CREW-Miami member since 1998