A closer look at expectations for 2012. Previous posts discussed how government oversight has emerged as the most impactful issue for CRE, and now we want to take a break from government, and offer some predictions for CRE and its drivers in this pivotal election year. As always, our approach is fact-based, using independent research to develop realistic predictions relevant to the economy, capital markets and alternatives, and commercial real estate.
Consensus estimates are often wrong. We have a solid track record of making more accurate predictions than the mainstream of forecasters, and in 2011 our expectations for a more modest economic and CRE recovery were closer to the truth than the excessively optimistic expectations of the majority. To emphasize how forecasts panned out last year, we have prepared tables that show what the consensus predicted in early 2011, compared with what actually happened, in addition to our exclusive predictions for 2012 – some of which may surprise you.
2012 PREDICTIONS for the ECONOMY
We were right about the economy in 2011. In early 2011, the majority of forecasters were predicting a strong rebound in the range of 3-4 percent for the economy, but our independent analysis found that 1-2 percent was more plausible, due to the maturity of the U.S. economy and persistently sluggish performance of underlying factors such as employment and housing. Our expectation turned out to be closer the truth, as GDP growth was 1.7 percent for 2011, representing a step backward from 3.0 percent growth in 2010.
Economic recovery will continue, but remain modest. Some forecasters are going overboard again this year, and once again our forecast is more conservative. We expect GDP growth to be higher in 2012, as unemployment edges down and housing shows signs of life, but to remain below 3.0 percent. One of the key factors inhibiting more GDP growth is uncertainty surrounding government oversight, especially the expectation that Dodd-Frank and Volcker Rule implementation won’t be finalized until after the election.
2012 PREDICTIONS for CAPITAL MARKETS and ALTERNATIVES
Stocks are a tossup, but capital markets will mostly be flat. In 2011, the majority boldly predicted significant stock market growth in the range of 15-20 percent, higher gold and oil prices, and a spike in interest rates. However, none anticipated the extreme stock market volatility of August and September 2011, which ultimately led to zero growth for the year. In addition, gold and oil prices didn’t climb as high as expected in 2011, and interest rates fell further instead of spiking. Stocks have enjoyed a strong run in early 2012, but have become so rapidly reactionary that it’s impossible to predict where they will end up, given the potential for unforeseen events that cast a shadow on growth prospects for the economy. We expect gold and oil prices to remain volatile and end up basically flat, and interest rates to remain unchanged despite some upward pressure, based on the Federal Reserve’s guidance that it intends to keep rates low into 2014.
Forecasters were wrong about alternatives. In 2011, forecasters were way off base in terms of predicting how alternative capital markets would behave. For example, the consensus expected great things from capital markets globally, especially emerging market BRICs, which were down significantly for the year – including China. Early in 2011, the majority of forecasters were also predicting a down year for the Euro, which turned out to be flat, and a nosedive for the Yen, which performed spectacularly. For 2012, we predict global capital markets will demonstrate a more positive performance, and that BRICs will also improve, although with lower growth than they enjoyed over the past decade. We believe the Euro is in recession, but will show a modest improvement over last year and that the Yen will continue to build on last year’s surprise performance.
2012 PREDICTIONS for COMMERCIAL REAL ESTATE
CRE on a rollercoaster ride in 2011. In early 2011, industry experts were overly optimistic about CRE, which started off strong, but hit a bump in the road in the second half, as a result of sluggish growth drivers, banks’ response to government oversight, and the intense stock market volatility of August and September. As a result of these and other factors, the steady recovery of CRE fundamentals slowed in 2H11, ample equity resulted in few deal closings, and debt and CMBS were curtailed. REITs outperformed stocks and most alternative investment types, but returns of 7.3 percent trailed expectations of 15-25 percent.
Will CRE 2012 repeat strong 1H11, or weak 2H11? We believe the gradual CRE recovery will resume in 2012, following a pause in 2H11. CRE hasn’t overbuilt the way it did in past cycles, and fundamentals such as vacancy and rent should improve, especially in marquee markets such as NYC. The ample supply of available equity will finally result in more closings, especially for core and distressed deals. REIT returns aren’t expected to boom, but should outpace stocks again, and remain compelling to investors for another year. Uncertainty about Dodd-Frank will likely keep underwriting standards restrictive, but availability of debt should improve somewhat, especially for cash flowing properties. CMBS took a nosedive in 2H11, and still needs to be reworked, but remains an inevitable
No CRE boom on the horizon, but no bust either. The gap between CRE and performance of the economy and capital markets is narrowing, and a more positive year for these factors will benefit the drivers (jobs, wages, retail sales, exports, business travel, etc.) for each CRE property type, especially apartments. The economy and capital markets will show moderate improvement in 2012, which will keep CRE moving steadily in the right direction.
The Big Three. Our next post will focus on macro and micro impacts of capital markets on CRE.
Dennis P. Yeskey