Every year around January and February, the focus of the conversation at regional and national conferences includes the state of the economy and forecasts for the future. As we enter 2017 with a new US President, changes in the House and Senate political landscape, and international policy shifts, the general consensus is that the US economy is strong and forecasts for the near future look good.
Part of the reason why PM Environmental keeps close tabs on the economy is to spot lending trends for the current and upcoming years. When the recession in 2007-2008 occurred, PM implemented a program to track its project numbers related to foreclosures, refinances, new purchases, and other transactional due diligence. Our program continues and has given us a clear picture of the way certain economic trends have influenced business in the past and will likely do so in future. In general, our findings correlate throughout the year with those of outside economic forecasts.
Most economists have indicated that due to the strong unemployment rate within the United States, and with the Federal Reserve indicating U.S. economic growth as stable, the economic forecast for 2017 will be favorable. A natural downturn in the economy will not happen for the next two to three years. Low unemployment also opens a demand for office space, retail space, and new industrial/commercial investments.
Another trend that will likely continue in 2017 will be strong investment in U.S. real estate from foreign investors. The U.S. real estate market remains to be a stable investment with strong demand. The reasons for this include a strong economy, strong rule of law for protecting investors, and transparency in the market. According to a survey conducted by the Association of Foreign Investors in Real Estate (AFIRE), three U.S. cities (New York, Los Angeles, and San Francisco) are in the top five global cities for real estate investment in 2017, due to these and other factors.
Dodd-Frank Act and Maturing CMBS Loans
The political landscape in the U.S. will continue to play a part in the economy and future trends. In December 2016, the Dodd-Frank Act risk retention requirement took effect, which requires sponsors of commercial mortgage-backed securities (CMBS) to hold 5 percent of every deal or assign the risk to a B-piece player (i.e. a second lender). These regulations came about in part due to the 2007 recession. As part of the campaign discussions, President Trump did discuss rolling back some or all of Dodd-Frank Act, which may impact future CMBS lending requirements and decisions. In the past few weeks, President Trump has continued to discuss changing the regulatory landscape for national lenders. Loosening regulations may result in more money for lending.
As part of the CMBS market, more than $100 billion in CMBS loans are set to mature in 2017, which will result in additional changes for financing with lenders. Along with Dodd-Frank Act requirements, these maturing loans may have trouble refinancing without additional equity and capital.
It may seem slightly peculiar that PM cares about economic forecasts. However, our strong history and focus on getting deals done, in any economy, as well as our commitment to being a strong partner in real estate, is why we continue to look at these forecasts. It allows us to better serve clients now and in the future.