The UCLA Anderson Forecast’s second quarterly release of 2014 picks up where the March forecast left off, calling for “normal growth” in the 3 percent range nationally through 2016. In California, the unemployment rate will continue to drop from 7.7 percent this year to 6.8 percent in 2015.
In companion articles, the Forecast examines a pair of real estate–related issues, with senior economist David Shulman looking at the nation’s commercial real estate sector and economist William Yu reporting on potential Chinese investment in the U.S. real estate market. All four reports will be presented publicly on June 12 at the UCLA Anderson Forecast's conference, “The Changing Landscape of Commercial Real Estate.”
The national forecast
In his June national report, “Something Is Seriously Wrong,” Forecast director Edward Leamer examines a number of long-term issues plaguing the U.S. economy and discusses the potential reasons the economy is growing more slowly than during its pre-recession peaks.
Leamer echoes David Shulman’s March 2014 report regarding the short-term economy, noting that despite longer-term concerns, real GDP will bounce back from its dismal showing in the first quarter.
“We forecast a 3.6 percent growth in the second quarter, with a 3 percent economy that gets a little healthier in 2016 — not a recovery, but normal growth,” Leamer says.
While the rate of unemployment will continue to trend downward to 5.4 percent in 2016, he says, inflation will remain quiescent, rising above the Fed’s 2 percent target. The Fed will sit on short-term rates until the first quarter of 2015, which may not affect the real economy, as housing starts edge slowly up to 1.5 million in 2016.
Leamer’s essay examines some of the longer-term economic issues that might be hindering an economic recovery. It includes a look at (1) the components of historical GDP trends and the fact none of the last three recessions have been followed by a real recovery, (2) the issues caused by permanent displacement of jobs in both the manufacturing and construction sectors, (3) problems associated with productivity and job displacements caused by microprocessors and technology, and (4) which components of GDP have been especially weak and how much of the problem is on the demand side.
The California forecast
The California forecast report, by senior economist Jerry Nickelsburg, focuses on home construction in the state. Titled, “Home Construction in California: Did It Stall from 1st into 2nd?", the essay looks at a pair of current trends — the state’s falling home sales and dramatically rising prices.
Nickelsburg’s essay concludes that the flat-to-negative growth in new homes sales, combined with increased prices, is an indication of a normalization in housing markets rather than a slowdown, and, therefore, home construction should continue its return to normal activity.
“While construction is still not a barn burner, and it is still not uniform across the state, we continue with our view that there will be a recovery in home construction before the end of the forecast horizon,” Nickelsburg says.
The state forecast anticipates total employment growth (payroll, farm and self-employed) of 1.8 percent in 2014, 2.4 percent in 2015 and 2.1 percent in 2016. Non-farm payroll employment will grow similarly, at 2.1 percent, 2.3 percent and 2.1 percent. Real personal income growth is forecast to be 3.1 percent in 2014, followed by 4.1 percent in both 2015 and 2016. Unemployment will decline through 2014, averaging approximately 7.7 percent for this year. In 2015, the unemployment rate is expected to drop to 6.8 percent on average, a percent higher than the U.S. as a whole, and then to 5.9 percent.
Edward Leamer and Jerry Nickelsburg discusses aspects of the national and state economies:
Commercial real estate reports
In addition to the U.S. and California economic reports, the Forecast is releasing a pair of companion essays looking at commercial real estate. In “The Changing Landscape of Commercial Real Estate,” Shulman covers different sectors in the market, including retail, office, industrial, hotels and multi-family housing, with a focus on disruptive technology that is undermining tenant demand for commercial real estate.
These disruptions, he says, are coming from e-commerce and downsizing of the amount of office space required for each employee.
“Put simply,” Shulman writes, “disruptive technology is defined as a low-cost solution that offers lower performance but represents a true value at the price.”
In his conclusion he writes, “We have outlined several very important issues facing commercial real estate. We do not expect investors will focus on the technological disruption facing retail, office and hotel real estate until capital market conditions become less favorable. There is too much money pouring into real estate to worry right now. Simply put, the worriers don’t get the deals. Nevertheless, when the capital markets turn, investors will wake up to the changing landscape for commercial real estate.”
Economist William Yu writes about where Chinese investors will turn, now that the real estate bubble in China has started to deflate.
“It will be a wise decision to relocate investment from China, a real estate market with low expected return and high risk, to the U.S., a market with a higher long-term return," he says. "Among the U.S. markets, large cities, such as New York, Los Angeles, the Bay Area and Washington, D.C., are good destinations in which to invest because of their depth and liquidity.”
Yu also says that for Chinese investors, West Coast cities like Los Angeles, those in the Bay Area, and Seattle are ideal locations for investment due to their geographic advantages, such as direct flights to China, mild weather and large Asian communities.
The changing face of commercial real estate
Shulman's and Yu’s reports will be presented (along with Leamer’s national forecast and Nickelsburg’s California forecast) at the UCLA Anderson Forecast’s quarterly conference on Thursday, June 12. The conference, which will look at the latest trends shaping commercial real estate across California and the nation, will take place in the Palisades Room at Carnesale Commons on the UCLA campus. Those interested in attending the conference may register here.