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ising employment, industrial inventories and prices will make the American economy’s recovery this year even stronger than most blue-chip economists forecast, Prudential Financial’s chief economist told a gathering of corporate and commercial real estate leaders Jan. 10 in Atlanta.
Susan Hickok, the keynote speaker at a forum of CoreNet Global and Commercial Real Estate Women at the Hyatt Regency Hotel, said that the trifecta of increasing employment, inventory recoveries and rising prices will push America’s gross domestic product growth to 5 percent in the first half of 2002 and 3.8 percent in the year’s second half.
“This is not your father’s recession,” said Hickok. “At Prudential Financial, all of our numbers point to a strong economy on the horizon, with a stronger and quicker recovery than the experts expect in the first and second quarter of this year. On the downside, inflation is a threat, and Treasury rates are poised to rise.”
Bucking the trend of predicting a much later recovery in the year, Hickok told her audience that the recovery was already well under way, citing the following data to prove her point:
- Residential construction growth will remain steady at 2 percent throughout 2002.
- Consumer spending growth will swell to a healthy 3.8 percent this year.
- Business investment will grow by 12.5 percent in the first half of 2002 and 8.5 percent in the second half of the year — largely due to inventory levels for capital equipment falling to historically record low levels in 2001.
- Government expenditures will grow by 2.8 percent in the first half of the year and 1.3 percent in the second half.
“The tax cuts of 2001 were a big reason why consumption kept growing last year despite the recession,” said Hickok. “Household expenditures will remain sturdy as income growth remains sturdy. Also, the rise in unemployment is beginning to taper off, as a number of companies announce the re-opening of plants they had shut down in 2001.”
For real estate managers and investors, the upturn in business equipment investment bodes well. “New orders for hard goods and capital equipment have been positive for the past couple of months, and that means that the manufacturing sector is turning around and starting to grow again,” Hickok noted. “Orders for semiconductor chips and new computers are once again on the rise, and we expect these increasing orders to once again drive up the prices of chips and computers.”
The only downside of the robust economic recovery, the economist predicted, would be the return of inflation. “Postage prices will go up, airline prices will go up, long-distance phone charges will go up, and the cost of semiconductor chips and computers will go up,” she said. “Prudential Financial predicts that inflation will hit 3.5 percent in the first half of 2002 and 3.1 percent in the second half.”
What does all of this mean for America’s commercial real estate markets? “Look for commercial real estate markets to bounce back in 2002,” says Sigrid Fennemore, senior commercial markets analyst for the National Association of Realtors. “While the weakening economy will cause demand to wane, the healthy state of property markets should mitigate the magnitude of the recession and control the uptick in vacancy rates across the 54 markets we survey through the end of 2002.”
Fennemore said that some property types will fare especially well this year. “The multi-family sector should get a boost from would-be homeowners opting to rent. In the retail sector, steady retail demand will continue to make grocery-anchored shopping centers attractive. A possible increase in stockpiling due to current uncertainty may lift demand for warehouses. In the office sector, those scouting for class B could upgrade and thus raise demand for class A space.”
Overall, Fennemore said, “the expected economic rebound should bode well and strengthen commercial real estate markets in 2002.”
Fennemore is particularly bullish on the industrial markets of Miami, Atlanta and Detroit, which she rates as the best three markets in 2002 for continued industrial investment. “In these markets,” she said, “the cumulative demand minus supply growth over the next two years is the best of any industrial markets in the entire United States.”
