Although the overall US economy grew at a pace that surprised many who expected Thursday’s economic data to enter recession territory, real estate investment was not so lucky.
Making a U-turn from the previous quarter, US real gross domestic product increased at an annualized rate of 2.6% during the third quarter, according to the first or advanced estimate by the Bureau of Economic Analysis on Thursday. The rise comes after a 0.6% annualized drop in the second quarter.
But investment in residential structures in particular sank, down 26.4% from the previous quarter, according to the BEA. In other words, far fewer houses are being built. Investment in non-residential structures decreased by 15.3%.
Residential investment subtracted 1.37 percentage points from GDP growth, the biggest drag since 2007.
“Residential investment declined for the sixth consecutive quarter, and the largest decline since the second quarter of 2020, and was attributed to residential construction and broker commissions,” Mortgage Bankers Association Chief Economist Joel Kan said.
The drop is consistent with other housing market data on home purchase applications, home sales and home starts, which showed significant weakening last quarter as mortgage rates hit multi-decade highs and economic uncertainty grew, Kan said. .
Other observers pointed out that the overall US economy may not be in a recession, but residential real estate is.
The Fed’s rate hikes have triggered a housing recession.
There was a massive drop in construction in the third quarter for both commercial and residential buildings.
Q3 residential investment: -26.4% –>basically as bad as spring 2020 when the pandemic first hit.
Business structures in Q3: -15.3% pic.twitter.com/6FqPjoV1nH
— Heather Long (@byHeatherLong) October 27, 2022
The headline GDP figure is important for commercial real estate because it provides an overall indicator of the direction of the US economy, said Mervin Jebaraj, director of the Center for Business and Economic Research at the University of Arkansas, adding that In addition to private investment in inventory, consumer spending is an important metric for the real estate industry.
Consumer spending, which the BEA calls personal consumption expenditures, rose 1.4% during the second quarter, with consumers buying fewer durable goods but more services.
“Private investment and inventories will give an indication of the direction of demand for office and warehouse space, while consumer spending figures will provide some indication of the direction of short-term lease rates and vacancies for commercial space,” Jebaraj said.
MSCI Chief Economist – Real Assets Jim Costello saying great snow that the new GDP figures are not going to change some of the underlying challenges facing CRE.
“There has been a lot of noise in the GDP numbers since 2020, with the closings and openings creating a rubber band effect of activity bouncing from growth to decline,” Costello said. “So if it’s up or down, I wouldn’t make much of it in the short term.”
The biggest current problem for the industry in the short term is the cost and availability of debt, he said.
“Remove 60% of the capital stack and you’re going to have a bad day,” Costello said. “It’s still not that bad, but everyone I talk to is worried about funding.”
Associated General Contractors of America Chief Economist Ken Simonson cautioned that while the anticipated figures are worth looking at, they will be revised in the near future as the BEA makes projections to cover the third month of the quarter.
“Furthermore, for the past few quarters, BEA’s estimates for private investment in non-residential structures have been much more negative than the impression I have of contractors or Census Bureau estimates,” Simonson said. “In short, I’ll look at the BEA numbers, but don’t expect to be guided by them.”