January 31, 2014
Led by a resurgence in consumer spending and devoid of many of the headwinds that restrained the economy over the last few years, economic growth in 2014 should surpass 3 percent, its highest level since 2005. Last year, GDP advanced 1.9 percent, though outsized gains in the second half of the year lend credence that the economy is on solid footing. As the private sector firmly grabs the reins of the recovery, government intervention is dwindling. The Fed has begun to unwind their economic stimulus and should close out its quantitative easing by the end of the year, while midterm elections should restrain legislative initiatives that impede economic growth.
GDP grew 3.2 percent in the fourth quarter, lifting the second-half pace to 3.7 percent, the strongest six-month rise since 2003. Consumer spending jumped 3.3 percent in the fourth quarter, marking the most significant gains since late 2010. Since two-thirds of the American economy is driven by consumption, the advance is an encouraging sign for the long-term economic outlook. Exports were also a strong contributor during the quarter, an indication that global economic momentum is improving.
Two components dragged on economic growth last quarter: government spending and the housing market. The partial government shutdown and reduced spending from sequestration resulted in a 90-basis points deduction from GDP growth. The reduced hours worked by government employees during the shutdown alone sapped at least 30 basis points from the economy. Housing, meanwhile, is adjusting to a higher interest rate environment amid higher home prices. The recent increase in valuations has priced many potential buyers out of the market while eliminating the viability of single-family homes as investment vehicles.
Impact on Commercial Real Estate
A consumer-led economic expansion will pay dividends for retail property owners this year. Space demand is anticipated to rise 1.6 percent during 2014, pulling down the overall vacancy rate by 60 basis points to 6.6 percent. For multi-tenant centers, the vacancy rate will decline to 8.5 percent.
Although a cooling housing market is dragging on the pace of economic expansion, higher prices will benefit apartment operations. For the first time since the housing bubble burst, the payment on a median-priced home exceeds the average rent. The strengthened renter demand will come as the nationwide inventory expands by 1.5 percent. Despite this construction surge, vacancy will finish the year up just 20 basis points at 5.1 percent.
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The information contained herein was obtained from sources deemed reliable. Every effort was made to obtain complete and accurate information; however, no representation, warranty or guarantee to the accuracy, express or implied, is made.