The U.S. Economy Shrinks in the First Quarter of 2022
The Basics of GDP
GDP stands for Gross Domestic Product. GDP
measures the output of goods and services
produced by labor and property located within
the U.S. during a given time period. It was
developed in the 1930s as a way for
policymakers to gauge the recovery from the
Great Depression. GDP is essential as it
measures the total monetary value of all goods
and services which is important for seeing the
economic growth or decline in the U.S.
The Shrinkage
The U.S. economy shrank in the first quarter of 2022, with GDP falling 1.4% in the first
three months of the year, the U.S. Commerce Department reported late last week.
Economists with CBRE Group Inc. (NYSE: CBRE) wrote last week the U.S. economy 1.4% shrinkage in Q1 was attributed to a decline in trade and inventory investment, which reflects the strength of domestic demand relative to a weaker global economy.
What does this mean for investors?
So far, the U.S. investment sales market for commercial real estate has been robust in 2022. Aggregate pricing was up 7.8% year-over-year in Q1 while investment volume reached $96.7 billion, according to Colliers International Group Inc. (NASDAQ: CIGI).
“The commercial real estate sector is in a pretty resilient position, as it was in 2019 and 2020 as we went into the covid crisis,” he continued “I haven't turned pessimistic just yet, especially for commercial real estate, but I would say buckle your seat belts to investors. Drive with caution”
“It might actually benefit certain property types and geographies,” said Victor Calanog, head of commercial real estate economics at New York-based Moody’s Corp. “capital is always looking to be deployed and for yield. In an environment of rising interest rates and potential uncertainty, U.S. commercial real estate is still an amazing promise of real yield
The Future
Consequently, we do not expect the Q1 drop in GDP will alter the Fed’s plans to continue hiking interest rates the year,” the economists wrote. “CBRE forecasts GDP growth of close to 3% for the year, which will underpin improving real estate fundamentals.”
Risks for the U.S. economy are more likely in 2023, as inflation falls and the lagged effects of tighter monetary policy take hold according to CBRE.
Calanog said most forecasters, including at Moody’s, are expecting capitalization rates to rise in accordance with the Federal Reserve’s moves. Calanog and others continue to expect the Fed to hike interest rates a half-percentage point this month, but economists have begun pointing to early signs of inflation potentially easing off.
Weitz Commercial Take:
While the above is from an AP article, we see a decrease in GDP as a major warning sign for the economy. While most don't believe it will have much effect on Real Estate prices, we think the negative effects (lease delinquencies and reduced SF usage in many classes (namely retail and office)) have not be recognized. While we remain confident in many mid-markets like Snohomish County, we think we are going to experience significant compression of lease rates and thus market values in 1) major cities; and 2) depressed areas. Bottom line: investors need to hedge as best they can, be very specific to growth areas, and reduce debt loads as best they can as change is coming.
For information on Snohomish County Commercial Real Estate consider contacting a Commercial Broker.
Our info:
Weitz Commercial
108 Union Ave
Snohomish, WA
Scott@WeitzCommercial.com.
