The US economy has been expanding for more than 10 years since the recession following the Lehman crisis in September 2008. The US stock market has recently hit a new high, but with the global low-interest rate environment, the inflow of funds into high-yielding financial assets continues, and real estate investment is one of them.
Real estate in the United States is also doing well, but there are concerns about the future of its performance, as regional and industry variations are reported. We will look back on the characteristics of the US real estate market from a long-term perspective, check the current situation on a macro scale, and then make a future outlook.
Conditions for the US real estate market:
There are several indices in the US real estate market. Here, we will check past trends in the Property Index of the National Council of Real Estate Investment Fiduciaries (NCREIF) for commercial real estate. This index consists of commercial real estate acquired for investment purposes and is widely used by US pension funds as a benchmark for real estate portfolios.
Looking at this NCREIF index together with the GDP growth rate over the long term, there have been four times in the past 40 years that economic growth has fallen into the negative territory, but real estate prices are in still full swing with only two adjustments having been made.
The first was due to the S & L crisis in the early ’90s, and the second was due to the Lehman crisis after the summer of 2008. A common factor is a boom in real estate-related financial products, the excessive inflow of funds into the real estate market, and the subsequent rapid credit crunch which not only caused the economy to fall into a recession but also prevented funds from flowing to the real estate market. In other words, it can be said that the real estate market was in a bubble-like situation before the adjustment, and then the real estate market-adjusted significantly due to the bubble bursting.
Supply and demand in the US real estate market are balanced:
Real estate supply is commensurate with growing demand
Let’s examine the current state of the US real estate market from both the actual demand side and the financial side. First, let’s check the actual demand.
Demand in the commercial real estate market extends to a wide range of fields such as offices, retail, warehouses, factories, and data centers. We will therefore consider the GDP growth rate as a typical economic indicator that represents demand in the real estate market. Regarding the shrinking of retail stores due to going online, the retail industry is estimated to be about 15% of commercial real estate, and the impact on the whole sector is considered to be limited. In addition, there is an increase in demand for real estate related to IT, which covers the shrinking retail stores.
The real GDP growth rate of the United States was expected to be slightly higher than 2% in 2019 and is expected to grow at around 2% going forwards. The potential growth rate is thought to be about 1.8%, and it is expected that the economic situation will continue to be strong, hence real estate demand will also continue to be in a strong position.
Yet, the supply of commercial real estate is often indicated by non-residential construction. After the Lehman crisis in 2009, non-residential construction continued to recover after hitting the bottom in March 2011, and exceeded the level before the Lehman crisis in June 2015, and been growing steadily since.
Sometimes, there is an oversupply, but it is important to compare it with demand in order to confirm supply and demand – an accurate representation of the supply and demand situation is non-residential construction divided by the GDP.
Before the Lehman crisis, non-residential construction accounted for less than 5% of GDP, but now it is around 3.6%, which is considered to be relatively calm. The relationship between supply and demand for commercial real estate, therefore, appears to be relatively balanced rather than oversupplied.
Moderate inflow of funds = still booming:
- Growth in real estate-related loans is slow
If favorable supply and demand continue under low-interest rates, the risk of price increases and speculative funds aimed at high yields will increase. However, due to the tightening of financial regulations after the Lehman crisis, it seems that there has been no excessive inflow of funds into the real estate market relating to financial products and lending.
- Low mortgage delinquency rate
Analysis of the repayment status of real estate-related loans reveals that the delinquency rate has historically low.
Demand for real estate is growing steadily, but it is known that commercial banks operate their real estate-related loan standards somewhat rigorously which also contributes to this.
- The real estate market is stable
As mentioned above, the US real estate market is considered to have problems in terms of supply and demand and financial aspects.
Looking closely at the real estate market, it is said that there are differences in supply and demand and profitability depending on the region and industry. As with the US economy, the real estate market has been strong for a long time, and there are concerns that this may gradually change. However, as mentioned above, looking at the US real estate market on a macro level, it has remained stable. Unless the low-interest-rate environment changes, the situation is not likely to change significantly.