It’s been nearly six months since Donald J. Trump took the oath of President of the United States and global investors and capital markets continue to seek clarity on a broad range of policy issues including tax reform, infrastructure spending, immigration, and government spending. Thus far, initial policy stumbles have been overlooked in the hope that significant changes over the next six to 12 months will elevate economic activity from the 1.5% to 2.0% rate. In other words, investors are trading on expectations that policy reform will unleash the economy and market’s “animal spirits.”
Nevertheless, there are signs of concern over the ability to generate meaningful policy change. This has been most evident in the volatility of the yield curve, which suggests that investors are getting nervous that Congress will not be able to achieve any meaningful legislation in the near-term. While not expecting any miracles, some strides towards a mélange of policy issues will go a long way in providing clarity and direction.
These questions and issues are not merely theoretical because they will likely determine the pace and direction of economic growth over the coming years. The good news is that the Trump Administration has some room to maneuver since key economic indicators are quite good. We expect the weakness of the first quarter to transform into stronger economic activity as the year progresses. What are the catalysts behind this? Our semi-annual edition of Inside Real Estate provides insight on these questions and more.
Key themes include the following:
- Can economic output accelerate? – As the U.S. economy heads towards its second longest post-WWII expansion, the good news is that there are few signs of any catalysts that could cause the economy to downshift, at least in the short-term. In fact, tight labor markets, improving headline inflation data, and strong global growth has created a favorable backdrop for policy reform to potentially lift growth higher over the coming months. Despite a disappointing first quarter, we believe that under a positive policy environment, the U.S. economy may accelerate to 2% to 2.5% in the second half of 2017.
- Fed signals tighter monetary policy – Signaling that the weak first quarter GDP reading was transitory, the Federal Reserve (Fed) has indicated that it will continue with its path of interest rate normalization in a measured manner. The Fed continues to guide investors towards two more interest rate increases in 2017, potentially setting the stage for upward pressure on yields.
- Supply side pressures are starting to mount – New supply remains low by historical standards, though there are clear signs that construction pipelines are ramping up and are approaching cyclical peaks. Apartment, office, and industrial should see peak cycle deliveries over the next 12 months, causing modest increases in vacancy rates and slower rent growth.
- Overweight to debt, but remain opportunistic in private equity – Core real estate investment performance has slowed meaningfully and has validated the caution we suggested in our 2016 annual report. Given the deceleration expected in rent growth and a slowing pace of appreciation, our broad tilt remains to debt over equity in core real estate strategies.
As we look to the second half of 2017 for more clarity, additional support to the United States could come from synchronized growth in the global economy as it expands in tandem for the first time since 2010. That said, global growth is forecast to hit about 3.8% to 4.0% in the second half of 2017, providing a favorable backdrop of demand for U.S. manufacturing and services. Investors may continue to find selective opportunities in private real estate strategies that can access markets with high barriers to entry, and still generate attractive opportunities for risk-tolerant investors.
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