Chief Economists: 2018 Could Be The 'Best Year Of The Entire Expansion'
One year ago, researchers for the top commercial real estate brokerages in the country were at a loss for predicting what 2017 would bring under President Donald Trump. After a year of relative stability, optimism has returned for a big 2018 for property markets.
"I feel like next year might be the best year of the entire expansion," Cushman & Wakefield Chief Economist Ken McCarthy said. "The U.S. economy seems to be picking up. With tax reform passing, you should see more investment. Europe is doing well, Asia is doing well. Next year could be the best year of the entire cycle."
If the economy were to dive tomorrow, we would have just experienced the third-longest recovery in modern U.S. history, McCarthy said. But fundamentals are strong enough to break a record, he said.
"We'll be the second-longest [expansion ever] by mid-2018 and longest by mid-2019. That’s not far off," he said. "Just because it’s, long doesn’t mean it has to end. There’s no such thing as duration as destiny. It’s long because it was slow. I’m pretty comfortable that this will be the longest expansion in history."
Though not all of McCarthy's peers share his level of optimism, Savills Studley Chief Economist Heidi Learner and CBRE Econometric Advisors Chief Economist Jeffrey Havsy told Bisnow they forecast more growth in 2018. Goldman Sachs economists predict the world's GDP will grow by 4% in 2018, bringing with it a rise in productivity, a factor that has lagged as the economy has rebounded since the Great Recession.
"I am surprised that the market and the economy as a whole have proven to be so resilient," Learner said. "We’ve had a lot of different mini-shocks — some political, some in other parts of the globe, some more [domestic]. Financial markets have really shrugged off any of this noise."
While the economy continues to add jobs, the amount of workers that use office space is not growing at the same pace. This is one concerning trend amid a rosy economic picture, Havsy said.
"Office depends on bodies. Unless we get greater labor force participation, that’s going to be an issue," Havsy said.
While U.S. fiscal policy did not change much in 2017, next year should have more legislative activity. Congress is in final negotiations over a tax reform bill that, while criticized for harming residential real estate, especially in New York City, could be a boon for developers. In January, Trump is expected to unveil his long-promised infrastructure spending bill.
Tax reform, on a macro level, is not expected to impact the economy in the next year.
"I don’t think it’ll move the needle much," Havsy said.
But an infrastructure package could make a difference.
"If that’s done right, that’s going to be a huge effect. That’s, to me, a bigger thing than the tax bill," Havsy said. "It’s going to juice the economy because it’s going to increase productivity. If you get rid of traffic jams, airplanes land on time, trains run more efficiently, that could get us running faster without overheating."
The fear of overheating has kept the cycle so long and fundamentals so strong, Learner said. Lenders' discipline, either mandated by post-recession regulations or conscious conservatism, has paired with caution on the part of buyers. But Havsy, McCarthy and Learner said the growth cannot last forever. Ultimately, even what could be the longest cycle ever must end.
"It’s less about any one factor than do you want to be the person that bought in at the peak?" Learner said. "The peak is coming, whether it’s now or a year from now or two years from now."
"I think 2018 will be fine, but I think in 2019 we are still concerned," Havsy said.
"At some point, you do get a correction," McCarthy said. "It will come."
Hear more from these economists, as well as some of New York's biggest developers, Tuesday at the Bisnow 2018 Forecast event at 400 Park Ave.