Underwriting Based on Strong Economic Growth

August 11, 2021

In the second quarter, GDP posted one of its biggest jumps ever—6.5%. Take away the giant 33.4% bounce back from the pandemic in the third quarter of 2020, and it was the strongest quarter since 2003.

And the signs are promising for the rest of 2021.

“It looks like 2021 will deliver annual economic growth in the high 5% to mid-6% range,” John Chang, senior vice president and director of research services at Marcus & Millichap, said in a recent video. “Now that’s a bit below what economists have been forecasting, but it would still be the strongest year of growth since 1984. Strong GDP growth reflects gains in sectors across the broader economy. Things like consumption, international trade, housing, business, investment, and government spending.”

In the first half of the year, Chang says retail sales rose 15.6%, triple the next best first quarter ever recorded. In addition, about 3.3 million jobs were created, which was the most jobs ever added in a first half of the year.

“Average hourly wages are up 1.6% since the beginning of the year,” Chang says. “Consumer confidence is back to pre-pandemic levels. Home sales are up by 7.8% compared to mid-year 2019 before the pandemic, and air travel is back within 10% of pre-pandemic levels. All of these are really robust results and point to rising commercial real estate demand across sectors.”

While office space demand is lagging, it moved into positive territory in the second quarter. Other sectors are experiencing a boost.

“We’re already seeing strengthening demand for housing, industrial space, retail space, seniors housing, hotel rooms, and self-storage,” Chang says.

Chang says that investors are underwriting based on solid growth through the remainder of this year and into 2022.

“Many of the investors that went to the sidelines through the pandemic have finally begun to return,” Chang says. “This release of pent-up investor demand has bolstered market liquidity, supporting a revival of transaction activity, basically bringing second-quarter commercial real estate sales back into alignment with the second quarter of 2019. Investor demand is being supported by particularly low-interest rates with the ten-year treasury back down to the mid-1.2% range.”

Chang says debt is increasingly available for most asset types, including hotels. “Just a few months ago, hospitality sector assets had a really difficult time getting financing,” Chang says. “But aside from a few notable exceptions, the market is starting to open up again.”

As we go forward, Chang the worry on interest rates is the Federal Reserve and its response to inflationary pressure. “For the short term, it doesn’t look like interest rates will push up soon, at least not substantively,” Chang says.

Chang expects the commercial real estate market to remain vibrant this year unless the Delta variant of COVID forces another economic shutdown or significant behavior changes or if Congress moves forward with substantial tax code changes.

“Although some headwinds could emerge in the second half, things are looking pretty good for commercial real estate investors right now,” Chang says.

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