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US Commercial Real Estate Market Rebounds Strongly

The US commercial real estate market had a very good year in 2013. Total transactions are estimated by the CoStar Group to have totaled over $370 billion last year, up 18% from the previous year. This was the highest total since 2007 when $490 billion in sales were recorded. These totals include office, industrial, retail, hospitality and land.

In Falcon Real Estate’s view, many of the uncertainties that the real estate market faced at the beginning of 2013 have been resolved and 2014 now appears on track to be another excellent year. All indications point to continued and accelerating growth in the US economy, with most estimates pointing to growth of over 3% by the second half of the year. The Federal Reserve Board has recognized this strength, reporting that eight of the twelve geographic districts in the US reported significantly faster economic growth as 2013 came to a close. As a result, the Fed has begun the long awaited ‘taper’ — reducing its $85 billion per month quantitative easing program by $10 billion each month, leading to its elimination later in the year. The Fed clearly feels that the growing strength of the US economy permits it to reduce the stimulus programs that dated back to the recession.

There are many factors that have led to the economic resurgence in the United States, but one of the most important has been the virtual revolution in the oil and natural gas industry. As fracking has become more widespread, the output of petroleum products has soared and the US may soon become an exporter of oil and liquefied natural gas. With natural gas prices having fallen to extraordinarily low levels, production costs in the US have followed, giving US manufacturers a competitive edge, and actually causing some producers to bring production back to the US from overseas.

As the economic recovery spreads throughout the US, the strength in the commercial real estate market has followed that recovery, as it always does. The markets in New York, Washington, San Francisco and Chicago have been doing quite well, but the booming Texas economy and the growth being experienced in many parts of the country has also sparked investor demand in such markets as Houston, Denver, Phoenix, Miami and Atlanta. Falcon is now seeing a great many attractive investment opportunities in these markets and others throughout the entire US.

US Economy

The general consensus among forecasters is that the US economy will lead the way again in 2014 with growth of about 3%. This compares with growth projections of about 1% for the euro zone, and a little under 1% for Japan. And each of the BRIC countries — Brazil, Russia, India and China — all of which were previously experiencing high rates of economic growth, are now facing slowdowns or other problems unique to each of them. The US economy is clearly benefiting from the stimulus programs enacted during the 2008/9 recession, but more significant benefits are being realized from the energy revolution brought about by the use of fracking in the oil and gas industry. This has not only created jobs directly in that industry, but has lowered costs throughout the economy leading to a drop in the unemployment rate to 6.7% in December, its lowest rate since prior to the recession.

Another major cloud that hung over the US economy has been the Federal budget deficit. This led to the so-called sequester, an act passed by Congress that placed an absolute cap on Government expenditures. Despite all the bad publicity about it, the sequester, together with a recovering economy, has caused the budget deficit to plunge 50%, from $1.4 trillion in 2009 to an estimated $744 billion in 2014. And Congress has now been able to pass a budget covering the next two fiscal years, removing this uncertainty from the economic picture.

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Quarterly Market Commentary

January 2014