The U.S. continues its economic expansion with improving fundamentals, inclusive of employment growth to pre-recession levels. This, coupled with good consumer confidence and historically favorable interest rates, equates to an improving outlook for the economy and a real estate investment market that is robust and compelling.
So where are we in the cycle? In my view, we are somewhere past the mid-point. We have been in economic recovery since 2009. The cost of our moderately paced growth has been substantial, both in terms of our debt via the stimulus, and the realities of the underemployed, unemployed and stagnant wage growth. However, underneath these issues, there is evidence of increasing stability and real growth.
To highlight the main points of our current economic environment, consider the stages of the economic cycle: recovery (low interest rate), expansion (job growth and demand growth), contraction (over supply and excessive leverage). I believe we are in the later stages of the expansion cycle. There is upside to this moderately paced growth: we do not have substantial oversupply of new development and as such, the fundamentals of real estate are improving. Still, much of the total return for real estate investments has been generated by low interest rates and compressing capitalization rates as investors search for yields. To this end, real estate is providing some of the best investment returns, and, if well-structured, it can provide more stable and predictable income and a hedge against inflation.
As we progress toward the later stages of the expansion cycle, now is the time to bring discipline to your real estate investment strategies. In the recent past, the concerns were more centered on the economic recovery. Now, the focus is shifting to how the real estate market adapts to the macro trends affecting the economy globally, nationally and regionally. These macro trends include urbanization, demographics and the impact of the new millennial economy, as well as the advances and influences of technology. All of these should be considered within the investment thesis and risk tolerance of the investor.
If this forecast is correct and we are moving further into our expansion cycle toward contraction, thoughtful, holistic consideration needs to be brought to your investment strategies. Consider recapitalization, re-finance, sale and exchange, as well as location, property type, tenants and term. It is a great time to invest in real estate. However, with an eye toward where we are in the economic cycle, it is also the time to rebalance and “right size” your real estate portfolio to optimize long-term value and minimize risk.