BK Perspective Real Estate USA 2016

Perspective on Real Estate 2016 - U.S.
monetary conditions in the U.S. Although this
tightening cycle is starting from essentially zero with
monetary conditions still highly accommodative, the
divergence in policy direction between the U.S. (and
possibly the U.K.) with the rest of the world is a key
economic theme for investors.
One major implication of this theme (and one we
briefly touched on in last year’s Perspective) is that
the flood of excess liquidity in the rest of the world
would find its way to the U.S. in search of not only
a safe haven, but comparatively better returns.
The ensuing surge in demand for U.S. assets over
the past year, particularly commercial property, is
certainly a reflection of what some have called the
“exceptionalism” of the U.S. economy. But there are
major economic consequences to this. In particular,
strong capital flows into the U.S. have caused a
sharp rise in the USD against its trading partners,
which is creating a very difficult environment for U.S.
exporters. It has also raised the broad possibility that
the U.S. is importing disinflation from the rest of the
world.
These risks, along with the slowdown in emerging
markets, the commodity price rout, and the constant
potential for geopolitical flare-ups have the capacity
to continue spooking global financial markets just
as they have done over the past year. As such, we
believe that the Fed will tread on a very cautious path
with its tightening cycle going forward. This is also
ultimately why we expect that the “New Normal”
theme of low growth, low inflation, heightened
volatility and low interest rates to persist for several
more years.
U.S. Economy: Goldilocks growth
Not unlike the rest of the globe, U.S. economic trends
in 2015 felt much the way they did in 2014. Growth
continued, but was unimpressive, and somewhat
disappointing relative to our expectations. In a global
context the U.S. remains a solid performer; however,
in many respects therein lies its challenges. Global
growth is slow. China’s deceleration reverberated
throughout the global economy, and its currency
resets were unexpected and disruptive to financial
markets. Geopolitical turmoil and domestic politics
also remain troublesome.
“We see the all-important U.S.
consumer making a positive
contribution to growth and also
clear indications that the housing
market is improving and helping
to spur economic activity.”
In the increasingly integrated global economy,
policy makers, central bankers and CEOs have had
difficulty charting the best course ahead. The Fed,
for example, must no longer be simply concerned
with U.S. inflation and unemployment as it makes
decisions on interest rates, it must also consider the
impact on U.S. trading partners (many of whom are
still trying to keep rates low) and the value of the
dollar, which should rise even higher as rates are
increased. The risk of importing disinflation from
abroad is significant and may even be a reality as
some weaker monthly retail sales reports have been
blamed at least in part on lower prices.
For those watching the economy in real-time, the
constant interjections of the 24-hour news cycle and
frequent – if not subsequent – gyrations in financial
markets have been troubling. But prudent real
estate investors analyze the hard economic data and
understand that not every daily headline corresponds
to actual trends in the business cycle. For our part,
we are focused on trends in “known” data – albeit
subject to revision – including GDP, employment,
the housing market, demographics and consumer
spending over meaningful periods of time.
14 | Bentall Kennedy (U.S.) Limited Partnership