In the latest edition of the Nareit REIT Report podcast, Calvin Schnure, Nareit senior vice president for research and economic analysis, shared his thoughts on the economy, real estate, and REITs in 2020.
In Nareit’s 2020 Economic Outlook, Schnure uses the term “uncharted waters” to describe the current environment. He explained that the phrase underlines the fact that the risks normally faced this far into a typical expansion or commercial real estate boom aren’t present at this time.
“We know there are risks ahead, we just can’t look to the usual corners to see where they are going to be,” Schnure said. He added that because there is no clear idea of when the current expansion might end, the descriptor “late cycle” doesn’t really apply. A more accurate term for the state of the commercial real estate market is that of a “mature recovery,” he noted.
Underscoring that idea is the labor force participation rate, Schnure pointed out. Only now is the rate approaching where it was in 2006 and 2007, and it’s still behind where it was in previous decades, he said. This means the economy can grow at the current pace without causing inflationary pressures—"that’s a good sign for the commercial real estate markets.”
The maturity of the recovery is also reflected in property prices, which so far have risen in line with NOI growth, Schnure said.
In terms of REIT fundamentals at the start of 2020, Schnure described them as “quite solid.”
“Construction has been at a fairly high pace for the past several years, but demand growth has been in line with construction,” he said. At the same time, REITs also have solid balance sheets, with leverage at the lowest in 25 years.