May 07, 2021

U.S. economy should support real estate

The U.S. real-estate sector looks set to get a boost from strongly improving demand at a time of still somewhat constrained supply. Not all sub segments are likely to benefit equally, though.

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The outlook for U.S. real estate is bright, in our view, driven by a combination of tightening fundamentals and supportive financial conditions. America's fiscal stimulus, totaling nearly 5 trillion U.S. dollars (25% of gross domestic product (GDP)), is by far the largest in the industrialized world (Japan and the UK follow at 16%-17% while Germany and France are near 10%).[1] Persistently high personal savings rates (averaging 17% since the beginning of 2020 compared with about 7% in the decade through 2019) attest to the spending power accumulated by home-bound consumers during the pandemic.[2] Meanwhile, Covid-19 vaccines promise to unlock the supply side of the economy. While risks remain (including the timing and final scale of the fiscal measures, household spending behavior, inflation pressure), the U.S. economy seems to be on a solid upward path.

Over the past 20 years, net absorption has exhibited a strong correlation (0.8) with economic growth.

"Location, location, location," is not the only thing that matters, as our Chart of the Week shows.

"Location, location, location," is not the only thing that matters, as our Chart of the Week shows. For real-estate markets overall, macroeconomic trends are just as important for real estate as are fundamentals. Over the past 20 years, net absorption[3] has exhibited a strong correlation (0.8) with economic growth.[4] This does not necessarily mean that space demand will match the economy’s breakneck pace. The drop in absorption in 2020 was less pronounced than that of GDP, suggesting that the rebound may be similarly muted. It is also arguable that structural headwinds in the office (remote working) and retail (e-commerce) sectors may temper demand, although these should be at least partially offset by tailwinds in the apartment (housing shortages) and industrial (e-commerce, logistics) segments.

20210507_Cotw_GDP_CHART_EN.png

* Moving-average four-quarters year-over-year growth
** Forecasts from IMF
*** Absorption is defined as four-quarters moving average new physical demand as % of average inventory over four-quarters
Sources: U.S. Bureau of Economic Analysis, Moody's Analytics, IMF and DWS Investment GmbH as of April 2021

Building costs increased 6% year-over-year in March, the most in 12 years

Supply-side discipline will also help to promote recovery

Supply-side discipline will also help to promote recovery, in our view. Multifamily and commercial construction starts ended the first quarter of 2021 down 10% and 30%, respectively, from year-end 2019.[5] Although debt markets have thawed since mid-2020, a net 26% of banks continued to tighten underwriting standards on construction loans.[6] Building costs increased 6% year-over-year in March, the most in 12 years, as prices for key commodities such as steel and lumber soared.[7] In our view, moderate supply and resurgent demand will stabilize occupancies and rents first in the apartment sector, and later (in 2022) in the office and retail sectors (while industrial property will likely remain strong throughout).

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1. Moody's Analytics. As of April 2021.

2. Census Bureau. As of March 2021.

3. Absorption is defined as four-quarters rolling new physical demand as % of (four-quarters average) inventory. The figures in this analysis include all real-estate sub segments.

4. Bureau of Economic Analysis (GDP); CBRE-EA (absorption); DWS calculations. As of March 2021.

5. Dodge Data & Analytics (commercial construction); Census Bureau (multifamily construction). As of March 2021.

6. Federal Reserve. As of March 2021.

7. ENR. As of March 2021.

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