By Owen Rice
July 2019. No, I am not predicting the beginning of the next recession in the U.S. In point of fact, according to the National Bureau of Economic Research, the current prolonged recovery will exceed the longest on record of 120 months (1991-2001), as the fireworks boom over Puget Sound, and ring in the Country’s birthday next July.
At that time, 121 months of growth, albeit choppy and uneven for much of the duration, does make one pause. How much longer is the expansion cycle? When will the party wind down? What will trigger the next recession?
Great questions, but let me add one more….How will Greater Seattle fare in the next downdraft?
In the intervening years since the Great Recession, the commercial real estate (CRE) sector in the Metro continues to outperform, as does the Seattle economy. As of April 2018, the Bureau of Labor Statistics Data shows unemployment at 3.6%, and an economic engine that outperforms many of the competing metros, as indicated by a robust Federal Reserve Economic Conditions Index.
The region has no shortage of innovative and dynamic companies: Amazon, Microsoft, PACCAR, Starbucks, Costco, Nordstrom, Expedia, Weyerhaeuser, Nordstrom and Expeditors International; a who’s who of the Fortune 500 headquartered in Seattle.
Back to CRE, the growth cycle in the segments: office, industrial and retail retain an upward trajectory with continued resiliency. Absorption numbers remain extremely positive, rental rates and sale prices are near, at or even exceeding their all-time record levels, and vacancy rates push ever lower.
Consider in the office segment alone the metrics:
- 12 month Deliveries in SF 2.8 million
- 12 month Net Absorption in SF 4.3 million
- Vacancy Rate 7.0%
- 12 month Rent Growth 5.3%
This is also having an amazing effect on Hughes Marino, as we are performing exceptionally well in this environment, and we continue to represent business owners eager to grow their operations.
For all of the positive news, the hot conversation among clients’ centers is on which inning the growth story stands?
As the Mariners are in second place (as of this writing), the analogy is fair. With tax reform’s effects kicking profits into high gear, a regulatory architecture less burdensome to business and a still historically accommodative Federal Reserve; the answer may very well be the seventh inning stretch.
There definitely is more game to play, but recent signs point to a slowdown approaching. Two recent Puget Sound Business Journal articles shed some light on the subject. The first highlights a dramatic drop in non-residential development projects: “$1.36 billion (down 55% from $3 billion in 2017).” The second, a flurry of sales activity at record prices for premium office space across the Metro, including Amazon tenant properties.
Despite this plunge in new development spending for the first four months of 2018, investors and the development community indicate the pipeline is set and strong through 2019.
Which leaves 2020. An election year, and by then approaching 130 months of expansion.
It certainly is difficult to assess the economic conditions of the future; a reason I am a commercial broker, not an economist, and subscribe to media baron Rupert Murdoch’s witty aphorism that: “We all know economists were created to make weather forecasters look good.”
Punditry aside, from the perspective of CRE, there are two important trend points, which may portend the end of this growth cycle: a string of months of negative absorption, and a surge in the sublease market.
Returning to Seattle’s potential resiliency to a downturn, the metro is well positioned with phenomenal companies, a diversified industry profile, highly trained and educated workforce, an entrepreneurial culture and a portfolio of innovation clusters. The Puget Sound region will outperform its peer metros in the downturn, as it has in the upcycle.
So we have not yet reached the end of this economic expansion. And interestingly, if famed investor John Templeton was correct that: “Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria;” there may be more room to run.
The next recession will provide an opportunity for reflection, not just in Seattle, but nationally on how far the economy has come from the depths of the credit contagion.
Let’s hope that before we get there, business and consumer confidence propels the cycle further ahead, and we move into extra innings!