U.S. and Regional Economic Outlook: All Signs Pointing Up
At a recent meeting attended by Cresa, Mark Vitner, a managing director and senior economist at Wells Fargo, described the economic outlook in the U.S., Georgia, and Atlanta for the upcoming year. Although the nation’s recovery from the Great Recession of 2008 has been the third longest in U.S. history, Mr. Vitner’s perspective remained generally an optimistic one, with particularly rosy predictions for Georgia and Atlanta.
Some of his key points included:
- While U.S. GDP grew slowly at the beginning of 2017, it will likely pick up pace and grow at 2.5 percent or more over the next few quarters. Consumer spending, homebuilding, and fixed investment by businesses should all tick upward.
- The Federal Reserve is expected to raise rates once more in 2017. The Fed’s monetary policy is focusing on “normalizing interest rates and offsetting typical late cyclical imbalances,” Vitner said.
- Atlanta is again one of fastest-growing metro areas in the country. The technology, entertainment, and hospitality/leisure sectors are leading the city’s job growth.
In recent months, non-farm employment growth has picked up in most sectors except retail, Vitner reported. Wage pressure is still lacking, suggesting that the labor market has room to tighten. Wages’ recovery has been slow partly because many potential workers remain outside the labor force. Displaced workers often lack the skills, experience, and/or credentials needed for available jobs.
Inflation has steadily advanced toward the Fed’s desired rate of two percent, but by most measures it continues to fall short of this rate, as it has since the end of the last recession. The recent slowdown of core inflation has spooked some members of the Federal Open Market Committee (FOMC), which may prompt the Fed to exercise even more caution about raising short-term rates.
Regulatory Changes (or Lack Thereof)
The first five months of Donald Trump’s presidential term saw the fewest new regulations put into place since the past four administrations. Trump’s regulatory restraint has boosted businesses’ confidence.
The ISM (Institute of Supply Management) manufacturing index has shown “broad-based strength” in 2017, according to Vitner. “Forward-looking” components—such as new orders and orders backlog—are also strong. The improved ISM related to industrial production probably indicates a strengthening among smaller manufacturers.
After a slow start, single-family homebuilding will steadily gain momentum over the next few years, Vitner predicted. Apartment construction is “topping out” but will likely stay at or near current levels as activity shifts to areas that were passed over during the recent boom and to less expensive suburban areas.
In terms of supply, port and e-commerce hubs are driving growth in warehouse building, while tech markets are leading growth in supply of new office buildings. In the retail sector, lifestyle and transit-oriented retail development is performing well.
Now that the U.S. expansion is in its ninth year, CRE fundamentals are beginning to cool. Occupancy rates have increased across all sectors except apartments, but if history is any guide, they will likely peak in the next few quarters. Additionally, the pace of asking-rents increases has slowed across property types as new supply comes to market.
Outlook for Georgia
Georgia’s employment growth has been among the nation’s highest, with room for more in a relatively low labor force. Professional and business services added the most jobs in 2017. Georgia’s tech sector represents 5.2 percent of jobs overall but accounts for 47 percent of job growth.
Housing permits have been ticking up slowly in Georgia over the past several years, although they still fall far short of their pre-recession peak. Home prices have recently recovered, as they have in the rest of the country.
Led by the professional and business sector, Atlanta’s job growth has been “exceptionally strong,” Vitner said. Growth in the city’s technology sector has become a key driver for the broader economy.
Atlanta still accounts for most of Georgia’s population growth and is one of only 16 U.S. cities with populations of 1+ million that have experienced population growth since the recession. Moreover, Atlanta attracts more young people than any other city. Even so, the state’s ratio of payroll jobs to population ranks “in the middle of the pack” compared to pre-recession levels, according to Vitner, with “ample room to grow.”
Metro-Atlanta’s office vacancy rates have been slowly dropping slowly, thanks to appreciable gains in office employment and limited new supply. Demand has been strongest in Midtown, Buckhead, and the Central Perimeter. Rents have risen considerably, prompting new construction, albeit it cautious and limited.
Atlanta has one of the strongest industrial markets in the U.S. Growth in global trade and e-commerce, along with a resurgence in the region’s factor sector, have bolstered this strength.
CRE Vacancy Rates
Industrial and apartment vacancies have decreased during the current economic expansion, but office and retail vacancy rates remain elevated. The emergence of e-commerce and the inward move away from suburbs toward central business districts are behind this trend.