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U.S. Economy Enters Second-Longest Expansion in Nation’s History

May 7, 2018

 

 

U.S. Economy Enters Second-Longest Expansion in Nation’s History

The U.S. economy entered its second-longest expansion since 1785. The expansion from 1961 through 1969 was, until May 1st, the second longest in U.S. history, and the only other expansion that has been longer was one that spanned the decade from 1991 to 2001. The current trend will need to continue through July 1, 2019 to officially be the longest economic expansion cycle on record. Long expansions are not the historical norm, points out Cushman & Wakefield researcher Revathi Greenwood. “Through World War II, the odds were fairly even that in any given year, the U.S. would be in a recession,” Greenwood said. “Since then, though, recessions have become less frequent. While context matters for why some expansions last longer than others; one thing is clear: they don’t die of old age.” The yield curve has been compressing recently, as short-term interest rates have risen faster than long-term rates, notes Cushman & Wakefield in its new “Economic Cycle” report co-authored by Rebecca Rockey. She predicts it has the potential to compress further or to sit comfortably as-is for some time. Other leading indicators, including confidence, the labor market, and manufacturing orders, remain strong, she says. However, Greenwood says, “there’s little reason to think that the end of the expansion is in sight. Tailwinds from the fiscal stimulus and the revival of emerging markets as a global growth engine bode well for the economy in the near term, and recent stock price volatility is probably telling us a lot more about investors’ reactions to earnings reports and their appetites for unpredictable policies, than anything about the business cycle. Popular leading indicators are not flashing red – it’s more like light orange.” (Connect)

 

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What Comes After Co-Working to Commercial Real Estate?

As an entrepreneur, I spend a lot of time thinking about the future and how my business and industry will be impacted by trends that are only just beginning to surface. But here’s the thing about trying to predict the future: Even the smartest people get it all wrong, because they focus on the headlines while failing to truly understand what’s driving the trends and where they may lead us 5 or 10 years down the road. For instance, in the commercial real estate industry, 2017 was a significant year for the co-working segment. But I believe that there is an industry shift happening that most people are not seeing. First, I want to first share an important lesson from a different industry: telecommunications. In November 2007, Forbes ran a cover story with the headline, “Nokia 1 Billion Customers — Can Anyone Catch the Cell Phone King?" Back then, Nokia was the dominant player in the market, producing nearly 50% of all mobile phones globally. Apple, scrappy and new to the phone market, had launched the first iPhone in June. The rest is history. Nokia wasn’t just “caught,” it was steamrolled by Apple. Even Steve Ballmer, Bill Gates’ Microsoft co-founder, didn’t see it coming, declaring that, “There’s no chance that the iPhone is going to get any significant market share.” The massive transformation in the mobile telecommunications industry coincided with a shift in form factor — in design and how people interact with that design — that we tend to underplay or miss entirely. Apple beat Nokia with hardware and software design that spoke to needs and wants that customers didn’t even know they had. In the process, Apple transformed an industry. I believe the commercial real estate industry is currently going through a similar transformation. Our economy is now driven more by innovation and information, less and less by manufacturing. And yet, the majority of our workplaces are modeled on the “old” economy assembly line, where workflow was linear and corporate structures were hierarchical. But the nature of work has changed, and our workforce has changed. Every day nearly 10,000 baby boomers retire. Their millennial children are currently the largest segment of the labor force and are predicted to comprise 75% of the workforce within the next decade. They’re digital natives who have little memory of life without mobile technology — they carry everything they need for work in their back pockets and their concept of work is no longer a physical place but an activity that, for better or worse, follows us everywhere 24/7/365. Old economy office buildings just don’t make sense anymore, and what doesn’t make sense gets disrupted. For all knowledge workers, including millennials, the primary purpose of the office is no longer to provide a physical space that allows us to be in close proximity to our colleagues in order to get work done, because work can be done anywhere. Today, the office — better yet, let’s call it the workplace — plays a far more strategic role: CEOs must use it to attract, retain and inspire the best and the brightest talent. Talent is the customer and as the customer changes, the building must also change. What does that look like? The very definition of occupancy is starting to change. The one-employee, one-desk office model will die, and the modern office will begin to feel more like a college campus, where employees use space according to the work that needs to be done: offices for heads-down work, collaborative spaces for brainstorming, conferences rooms for formal meetings, cafes to catch up on reading. The future workplace policy will revolve around choice and flexibility. Big tech companies like Google and Apple are famous for their campus-like workplaces, but the model is also replicable within office buildings, where landlords can recreate Googleplex-like environments by building out amenity-rich spaces vertically instead — cafes, meeting spaces, classrooms, lounge areas, gyms — that are shared by all tenants, whether they are huge anchor tenants or small startup companies. This is the form factor shift that our commercial real estate industry should be preparing for — and where there’s also an abundance of opportunity. The landlord’s role will need to change from a commodity seller of space to a provider of a “vertical campus” workplace experience. It can certainly be argued that the unit economics change by rebuilding buildings to become vertical campuses. In fact, most commercial real estate investors currently feel that the market is priced outside of what makes sense. However, it is possible that the peak of the commodity price point becomes the baseline of the experiential price point. A better, more seamless experience is what consumers will pay a higher premium for, as Apple has taught us. Nobody had ever imagined paying more than $1,000 for a phone. Commercial real estate landlords should be next to build from the foundation up in anticipation of shared services, and flexible space is already happening. Landlords will need to become brands in order to better compete. Tenants will be treated as guests, and the workplace will be a customer-centric service that provides a work/life integration experience. (Christopher Kelly, Co-founder Convene)

 

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US Adds a Modest 164,000 Jobs; Unemployment down to 3.9 Pct.

U.S. employers stepped up hiring modestly in April, and the unemployment rate fell to 3.9 percent, evidence of the economy’s resilience amid the recent stock market chaos and anxieties about a possible trade war. Job growth amounted to a decent 164,000 last month, up from an upwardly revised 135,000 in March. The unemployment rate fell after having held at 4.1 percent for the prior six months largely because fewer people were searching for jobs. The overall unemployment rate is now the lowest since December 2000. The rate for African-Americans — 6.6 percent — is the lowest on record since 1972. Many employers say it’s difficult to find qualified workers. But they have yet to significantly bump up pay in most industries. Average hourly earnings rose 2.6 percent from a year ago. The pace of hiring has yet to be disrupted by dramatic global market swings, a recent pickup in inflation and the risk that the tariffs being pushed by President Donald Trump could provoke a trade war. Much of the economy’s strength, for the moment, comes from the healthy job market. The increase in people earning paychecks has bolstered demand for housing, even though fewer properties are being listed for sale. Consumer confidence has improved over the past year. And more people are shopping, with retail sales having picked up in March after three monthly declines. Workers in the private sector during the first three months of 2018 enjoyed their sharpest average income growth in 11 years, the Labor Department said last week in a separate report on compensation. That pay growth suggests that some of the momentum from the slow but steady recovery from the 2008 financial crisis is spreading to more people after it had disproportionately benefited the nation’s wealthiest areas and highest earners. The monthly jobs reports have shown pay raises inching up. At the same time, employers have become less and less likely to shed workers. The four-week moving average for people applying for first-time unemployment benefits has reached its lowest level since 1973. The trend reflects a decline in mass layoffs. Many companies expect the economy to keep expanding, especially after a dose of stimulus from tax cuts signed into law by Trump that have also increased the federal budget deficit. Inflation has shown signs of accelerating slightly, eroding some of the potential wage growth. Consumer prices rose at a year-over-year pace of 2.4 percent in March, the sharpest annual increase in 12 months. The Federal Reserve has an annual inflation target of 2 percent, and investors expect the Fed to raise rates at least twice more this year, after an earlier rate hike in March, to keep inflation from climbing too far above that target. The home market, a critical component of the U.S. economy, has been a beneficiary of the steady job growth. The National Association of Realtors said that homes sold at a solid annual pace of 5.6 million in March, even though the number of houses for sale has plunged. As a result, average home prices are rising at more than twice the pace of wages. (Denver Post)

 

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Cluster of 7 Buildings in RiNo Sells for $50 Million-Plus

Real estate company Edens has purchased seven buildings around Denver Central Market in RiNo. The total purchase price was $50.86 million. Edens is a $6.5 billion real estate owner, operator and developer with properties nationwide, according to the company. "We pride ourselves in looking at places from the bottom up," a spokesperson for the company told Denver Business Journal. "We look at it from the human scale." The buildings were owned by various groups registered to addresses in Denver, including Macmeier LLC, North of the Border LLC, Wolf Properties LLC. All of the deeds are signed by Ken Wolf, who worked with Jeff Osaka to develop Denver Central Market. The spokesperson could not confirm the address of the seventh building and public records weren't immediately available. In a popular area of RiNo, tenants of these buildings include Denver Central Market, Park Burger RiNo, Biju’s Little Curry Shop and First Draft Taproom & Kitchen. Denver Central Market first opened its doors in 2016. Edens does not have one headquarters, though it originated in Columbia, South Carolina 50 years ago. It has offices in several cities, including Boston, Atlanta, Charlotte, Dallas and Miami. (Denver Business Journal)

 

Prologis Buying Denver's DCT Industrial Trust for $8.4 Billion

In one of the biggest Colorado deals in quite awhile, a Denver real estate investment trust is being purchased by a California firm for $8.4 billion. Prologis Inc. of San Francisco will acquire DCT Industrial Trust Inc. (NYSE: DCT) and its 71 million-square-foot operating portfolio in a stock-for-stock transaction, including the assumption of debt. As part of the deal, DCT shareholders will receive 1.02 Prologis shares (NYSE: PLD) for each DCT share they own. As reported by the Denver Business Journal in 2016, Tom Wattles founded DCT Industrial in 2003 and appointed Philip Hawkins CEO. Hawkins led the DCT through an initial public offering in 2006. "This transaction underscores the exceptional quality of DCT's portfolio, platform and customer relationships, which our talented team has worked hard to create," Hawkins said in a statement. After the deal closes, Hawkins is expected to join the board of Prologis. In June, DCT was ranked the 14th-fastest growing company in the state by the Denver Business Journal, with net income growing 89.28 percent between 2014 and 2016. (Denver Business Journal)

 

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Denver Is a Top 10 Market to Invest in Real Estate, CBRE Says

Denver’s red-hot growth has caught the eyes of global real estate investors. While Denver is booming, commercial real estate investment returns across the continent actually have fallen in the past year, according to CBRE. That has investors “racing to find the next Seattle by increasing their focus on the higher-yield potential of high-growth secondary markets,” wrote Spencer Levy, head of research and economic advisor for CBRE in the Americas. The annual survey polls 300 real estate investors on their future intentions. Denver ranks No. 7 on the list, up from No. 8 in 2017. “Seattle is the only market I’ve ever seen advance from a secondary to a primary market status,” Levy wrote. (Seattle tied with New York for third place this year). “There are few other secondary cities that are close to repeating Seattle’s feat, led by Austin, Denver and Nashville in the U.S. and Sao Paolo, Brazil and Montreal, Canada in the Americas.” Overall in the Americas, investors are optimistic about commercial real estate and expect to boost purchases by about 45 percent from the previous year. For the second year in a row industrial space is the preferred asset, with half of the respondents saying it was their top choice for investment. Multifamily and office followed in that order for the second consecutive year. The first quarter of 2018 closed strong in the Denver industrial market, particularly with a record setting industrial sale earlier this month. (Denver Business Journal)

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CURRENT

1 MONTH PRIOR

1 YEAR PRIOR

FED TARGET RATE

1.75

1.75

1.00

3 MONTH LIBOR

2.35

2.32

1.17

PRIME RATE

4.75

4.75

4.00

10 YEAR TREASURY

2.90

2.81

2.35

30 YEAR TREASURY

3.02

3.04

3.00