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U.S. Economy Grew Surprisingly In Third Quarter, But Real Estate Took A Beating


Although the broader U.S. economy grew at a rate that surprised many who were expecting the economic data reported Thursday to slip into recession territory, real estate investment wasn't so fortunate.

Making a U-turn from the previous quarter, real U.S. gross domestic product rose at an annualized rate of 2.6% during Q3, according to the first, or advance, estimate by the Bureau of Economic Analysis on Thursday. The rise comes after an annualized drop of 0.6% in the second quarter. 

But investment in residential structures in particular took a dive, down 26.4% compared with the previous quarter, according to the BEA. In other words, many fewer houses are being built. Investment in nonresidential structures was off 15.3%.

Residential investment subtracted 1.37 percentage points from GDP growth, the largest drag since 2007.

“Residential investment declined for the sixth straight quarter, and by the most since the second quarter of 2020, and was attributed to residential construction and broker commissions," Mortgage Bankers Association Chief Economist Joel Kan said.

The drop is consistent with other housing market data on home purchase applications, home sales and housing starts, which showed significant weakening last quarter as mortgage rates reached multidecade highs and as economic uncertainty grew, Kan said.

Other observers noted that the U.S. economy in general may not be in a recession — but residential real estate is.

The headline GDP number matters for commercial real estate because it provides an overall indicator of the direction of the U.S. economy, said Mervin Jebaraj, director of the Center for Business and Economic Research at the University of Arkansas, who added that besides private inventory investment, consumer spending is an important metric for the real estate industry to watch.

Consumer spending, which the BEA calls personal consumption expenditures, edged up by 1.4% during Q2, with consumers buying fewer durable goods but more services. 

"Private investment and inventories will give an indication of the direction of demand for office space and warehouses while consumer spending numbers will provide some indication for the direction of near-term lease rates and vacancies for retail space," Jebaraj said.

MSCI Chief Economist-Real Assets Jim Costello told Bisnow that the new GDP numbers aren't going to change some of the underlying challenges CRE faces. 

"There has been a lot of noise in the GDP figures since 2020, with the lockdowns and openings creating a rubber-band effect of activity bouncing from growth to declines," Costello said. "So if it is up or down, I wouldn't read too much into it in the near term."

The biggest current issue for the industry in the near term is the cost and availability of debt, he said. 

"Take away 60% of the capital stack and you are going to have a bad day," Costello said. "It isn't that bad yet, but everyone I talk with is concerned about financing."

Associated General Contractors of America Chief Economist Ken Simonson warned that while the advance numbers are worth looking at, they will be revised in the near future, since the BEA makes projections to cover the third month of the quarter. 

"Moreover, for the past several quarters, the BEA estimates for private nonresidential structures investment have been far more negative than the impression I get from contractors or Census Bureau estimates," Simonson said. "In short, I will look at the BEA numbers but don't expect to be guided by them."