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NAIOP NJ Outlook: Moderate Growth Will Help CRE Industry Avoid Overbuilding

Andrew Nelson, chief economist for Colliers International, speaking at the NAIOP NJ Real Estate Outlook meeting in Short Hills, NJ. (Steve Lubetkin Photo/StateBroadcastNews.com. Used by permission) Andrew Nelson, chief economist for Colliers International, speaking at the NAIOP NJ Real Estate Outlook meeting in Short Hills, NJ. (Steve Lubetkin Photo/StateBroadcastNews.com. Used by permission)

SHORT HILLS, NJ—The economy is growing at a rate just strong enough to keep investors interested in commercial real estate, but the industry should be able to avoid speculative overbuilding, says Andrew Nelson, chief economist for Colliers International, who spoke recently at NAIOP New Jersey’s Annual Meeting and Commercial Real Estate Outlook.

“In 2016, the US economy saw moderate growth that was strong enough to fill our space and encourage investor demand for our products,” says Nelson. “It was not so strong as to overheat markets and encourage a lot of speculative construction that would ultimately undermine the recovery.”

Nelson presented an overview of how economic, industry, demographic and political trends are likely to impact New Jersey’s commercial real estate market.

While this growth expected to continue for another year or two, there are indications that the economy is nearing the end of its current expansion. He also suggested that it’s time to stop referring to the economy’s state as “a recovery.”

“We’re not in recovery, we’re in expansion now,” he says. “By most metrics, the US economy is stronger now than it was at the prior peak.”

Sales are up, home starts are at sustainable levels, and “we have more jobs in this country than we’ve ever had,” he says.

“This cycle has lasted over seven years and is one of the longest in US history,” says Nelson. “But the longer you are growing, the greater the likelihood that something will dislodge.”

The uncertainty surrounding the outcome of the presidential election could mean the economy and the industry will face some choppy waters. However, Nelson says there are signs of optimism.

“There is the unknown of an incoming administration, which portends a lot of change. Wall Street seemed pretty happy initially,” he says. “Wall Street got a little bit ahead of itself, I think. There is some strong upside potential, but there are also significant risks.”

He noted that all areas of the country have not shared evenly in the recovery. Wage growth has been flat until recently and the strong dollar has held down manufacturing and imports. Knowledge-worker jobs have been improving, but blue-collar jobs have been declining, he says.

“Blue collar workers are essentially making now what they made in 1964, so I think that helps to explain some frustration out there among voters,” he says.

Nelson believes the expansion could be lengthened by several of the new administration’s proposals, which have the potential to spur economic and job growth in the next few years. He cited a proposed stimulus package of tax cuts and infrastructure spending, and efforts to create a more business-friendly tax and regulatory environment as examples.

In New Jersey, this could benefit the pharmaceutical and financial services sectors, the latter of which has experienced a lag in job growth in recent years. The stimulus would also be good news for most property sectors, especially the office market, as the financial sector typically leases more office space than any other.

New Jersey’s industrial sector is outperforming the US, benefitting from the growth in ecommerce at the expense of traditional retail.

It remains to be seen how proposed trade policy changes and tax cuts will impact retailers, particularly those that rely heavily on imports, Nelson says. While the multifamily market continues to enjoy below-average vacancy rates, investors should anticipate higher interest rates because of reduced financial regulations.

 

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