Economic growth is looking up, despite its feeble rise the past four years. The long-term trend of 3.1% increase rose to 4.1% for quarter three of 2013, which leads us to believe that positive growth can be attributed to technology, energy, agriculture and housing.
U.S. consumers are in healthier financial positions to spend more. Nearly $1 trillion of household debt has been paid down (or defaulted on). Household debt-service burdens are lower than they have been in more than thirty years, according to Federal Reserve data. The amount of disposable income compared to household wealth has exceeded its historical average. With the financial and housing markets recovering and the growth of job creation, consumers are more willing to spend larger amounts of their disposable income.
Due to labor deflation and weak inflationary pressures, it is plausible that the Federal Reserve is encouraged to keep monetary policy loose for quite some time. It can be foreseen that the decrease in asset purchases will lead to Federal Reserve monetary expansion through midyear – thus, Interest rates will increase from 3% in January to about 4% by year’s end.
Since 2011, new construction of commercial properties has been extremely low and looks to continue that way through 2014. This will prolong the supply-demand equation.
2014 should bring in high transaction volume for commercial real estate, if it follows the trends of 2013. Total returns to commercial real estate have been quite strong for three consecutive years now. Expect significant increasing investment flows from institutional and retail investors this year.
As bonds are expected to bring more negative returns with the rise of interest rates, commercial real estate’s potential to minimize inflation and interest-rate risks will become much more attractive. Equity markets are also continuing to bounce back, luring in many fixed income investors. This ultimately may lead to the rotation from fixed-income into equities, or more directly into income-oriented investments, such as commercial real estate.
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