Survey Shows Real Estate Execs Optimistic About “Soft” Ending Cycle – We're Not So Sure

In a recent survey, 1600 real estate executives expressed optimism that the current cycle would both last longer and have a softer ending than past cycles. We found an article in Pensions & Investments online and boiled down what you should know and our own feelings on how things may end.

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According to Mitch Roschelle, partner at PricewaterhouseCoopers (who released the survey), this time is different. Survey respondents are expecting a long cycle; and Roschelle said up to five years is possible. Mr. Roschelle indicates that respondents seem indeed to be focused on the long game and have “stopped looking” at whatever “could go wrong next year.” He also explains that although we're currently in the middle of economic expansion, it isn't rapid expansion – which actually makes it more sustainable (and less volatile). The article quotes him as saying there is “nothing pushing us toward a correction.”

The slowly growing national GDP is also a positive; at a mere 2.1% average increase, the national economy isn't in enough of a “boom” that would initiate a corresponding “bust.” The ongoing low interest rates (which we've written about previously) also reduce the risk of a big correction and represents what the report calls “a soft landing vote.” Another safety valve is that while real estate has become more transparent, more are investing in the asset class. Roschelle notes that it feels like cash will flow in and not out of the asset class, which would otherwise cause a correction.

Yet, the article does note that despite the overwhelming belief of an up cycle without a painful end, there are some risks. Survey respondents replied that job growth, income growth, land and construction costs, among others were among the top issues for real estate. The report itself cites the past thirty years of income inequality, flat-lining wages, as well as regional issues as threats to demand drivers across the economy, including real estate. The article then points out that slow wage growth may be a benefit, because wage growth faster than 4% could lead to the Fed hitting the brakes – and any Fed miscalculation could cause recession.

The report does tackle the current real estate investment trend of investing in smaller cities, which we've also covered. In 2011, investors in what the report terms a “defensive” posture, bought in cities like San Francisco or L.A -  “gateway cities.”  Since then, investors have moved into smaller markets like Dallas, Salt Lake City, Raleigh and others; this year Seattle is the city to watch for overall prospects with Austin, TX a close second.

Our prediction differs a bit from the real estate investor survey. We don't agree that this time will be quite so different; although we don't anticipate a second great recession, it's always a great time to be anti-fragile to the downside! There's nothing wrong with optimism: but a healthy dose of realism as well as noting factors likely to change (those currently-low interest rates, for example -as we've written about extensively) is also sensible.

Elizabeth Wheeler