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The Cal State Companies:  Center for Real Estate Studies ¨ Cal State Properties ¨ Cal State Investment LTD Partnership

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Real Estate Investment Outlook

September 2019

         

          LOS ANGELES, CA. Economic growth in the second quarter was slightly better than expected. The economy expanded at a pace of 2.1%, while the growth rate for the first quarter was downgraded from 3.2% to 2.7%, showing that our economy has been losing steam since mid-2018.  The fact that the economy has held up better for a while is due to the fiscal stimulus and tax reduction at the beginning of 2018. This effect is now fading for real estate

          If employment remains stable with future job creation, household consumption will continue to support economic growth, while the deterioration in business will damage the upturn of real estate. Another force of growth incentive in 2019 and the following two years will be an increase in government spending, as Congress and the president have announced a plan to raise spending caps for fiscal years 2020 and 2021. Trade will continue to make a negative contribution to growth despite the protectionism of the administration. Against the backdrop of high employment and stable domestic demand, the probability that our economy will fall into a recession remains moderate for now.

          Wage pressure is rising only slowly. Thus, inflation rates are well below the target rate of 2%, at around 1.6%. Banks can therefore adjust their policies to reflect the blurring outlook for the economy. The banks have already reacted to the unexpectedly low inflation and the risks inherent in Trump’s trade policy. The Fed already stopped cutting interest rates. Therefore, they have taken a wait-and-see stance, given the trade tensions between the US and China.

          We now expect that the Fed will adjust its stance, given the trade tensions between the US and China, to alleviate the negative impact of declining trade growth on the economy. Given the rise of our corporate advantage by approximately 48%, according to the US Flow of Fund statistics, since the end of the Great Recession, lower interest rates may help to better mitigate lower revenues in case of slowing demand, and may help to stabilize employment growth, disposable income and the real estate industry.

          The US current account deficit has decreased relative to the highs of the 2002 – 2007 periods, but remains by far the largest in the world at 2.4%.  Although the current account deficit implies that we are funds importers, this can sometimes be misleading with respect to gross flows. US investors are one of the largest portfolio capital exporters in the world. For example, in 2012 – 2014 they were buying more foreign stocks and bonds per year than Eurozone and Japanese investors combined. In Q1 2019, overall G3 demand for foreign portfolio assets fell to the lowest levels since the Great Recession in 2008

          In spite all of this tension, however, it is not inconceivable that deals could be done and real estate investors could relax once more. However, the uncertainty persists for now and the longer these concerns affect real estate investments, the longer plans could be held back. Nevertheless, many parts of our economy are holding up well, in particular the service sector on the supply side. On the demand side, consumer spending should save the current economic expansion given the level of employment and steady wage growth.

ABOUT THE AUTHOR: Eugene E. Vollucci,  is considered to be one of the foremost authorities on real estate taxation and  investing and has authored books in these fields published by John Wiley & Sons of New York. He is the Director of the Center for RE Studies, an educational and research organization. To learn more about the Center, please visit our web site at http://www.calstatecompanies.com

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