Economic Development and Real Estate

The good and bad of real estate climate

GVSU associate dean expects strong year in 2018 followed by weak recession in 2019.

March 23, 2018
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(As seen on WZZM TV 13) The real estate sector in 2018 is expected to be a strong year, but the current projection indicates this good year will be followed by a weak recession in 2019.

The Building Owners and Managers Association of West Michigan (BOMA) and the Institute of Real Estate Management West Michigan (IREM) held a joint luncheon earlier in March, where Paul Isely presented his economic real estate forecast for 2018 and 2019.

Isely is an economist and associate dean of the Seidman College of Business at Grand Valley State University.

Based on survey responses, Isely predicted 2018 would be a strong year for real estate. Leaders of 1,200 West Michigan businesses that have at least 50 workers were asked about their economic confidence — 250 of those replied. Isely said the overwhelming majority of respondents were “giddy” about the state of the Michigan economy.

“What’s interesting about this is they are as confident now as they were in the late 1990s,” Isely said. “My students were leaving with undergraduate degrees and being paid more than I was as a professor in the late 1990s.”

West Michigan also has led the way on employment growth, which has been double both the national average and state average over the past five years.

“People like West Michigan, and that’s drawing people to West Michigan,” Isely said. “That’s part of the reason you see all these cranes.”

Even though employment growth is strong in West Michigan, it is slowing. In 2017, employment growth was at 2.4 percent. Isely predicted employment growth will dip to 1.8 percent in 2018.

Muskegon County might grow slightly faster than 1.8 percent because there is labor available. One of the reasons Isely gave for the regional slowdown is there aren’t enough workers to fill open positions.

Spending also has slowed in West Michigan, particularly during the uncertain 2016 presidential election, Isely said.

“It didn’t matter who would get elected because once they got elected, we could figure out which policies and which games to play,” he said.

But the rest of the U.S. came out of the 2016 spending slump faster than Michigan. Isely explained the state has been slow to recover because a large portion of its economy still is in the automotive industry.

“One in 5 jobs here in Michigan is either directly or indirectly automotive still today,” he said. “The slowdown that’s projected for automotive this year — from 17.5 (million) down to about 17 million units — is the equivalent to about 30,000 jobs in Michigan.”

Isely added the slowdown is good news, however, for the construction and real estate sector, which is looking for additional workers. The projected 30,000-job loss in the automotive sector would be absorbed relatively quickly.

Nevertheless, following the good news for the real estate and construction industry, Isely predicted the next recession is arriving soon.

The first indicator Isely gave for a coming recession was the current relationship between potential gross domestic product versus actual GDP. Potential GDP is the maximum value of goods an economy can produce without creating inflation. Once actual GDP is greater than potential GDP, it usually causes a recession 18-24 months later.

Isely said the national economy was above potential GDP in the third quarter of 2017, which means the probability of a recession occurring in the second half of 2019 is up considerably.

Wage growth also is an indicator. When the labor market is tight, wages tend to go up, but Isely said it becomes a problem when wage growth surpasses productivity.

“You can increase wages as long as the stuff you’re selling, you can sell for a higher price, or if those workers can produce more stuff,” he said. “If neither of those is true, and you increase wages, what type of business are you? Out of business.”

Isely said wage growth overall hasn’t yet surpassed output, but it’s still a cause for concern because the wage growth is asymmetric. Some industries are experiencing steeper wage hikes than others.

There also is a generational gap in wages. Isely said millennials on average are paid less than baby boomers, and as more boomers are entering retirement and making way for a younger workforce, the change should drive down overall wage growth.

But because the labor market is tight, Isely said employers now are tapping into the older workforce to fill the gap, in addition to hiring more people with disabilities and criminal records.

“And we’ve discovered that they’ve stopped testing for drugs,” he added. “Why? Because of these people left; when we see them apply for jobs, 40 percent of them are failing the drug test.”

In West Michigan’s manufacturing sector specifically, Isely claimed if employers were to test their workers regularly, they would have to fire half of their line.

“All of that is leading to an increase in people who can work,” he said. “The question is: Are they as efficient as those people you were picking before?”

If the next recession were to occur in the latter half of 2019, Isely predicted it would be a “shallow” recession, and it may even pass over certain sectors, like exports and housing.

“If you don’t live in downtown Grand Rapids, your housing prices are going up much faster than the nation,” he said. “In rural areas, it’s going up slower than the national average, but in every case, your house is worth more than it was in 2005.”

With more millennials entering the housing market, demand is increasing for single-family units, but new inventory is tight. Isely said the millennial population (ages 25-35) in Kent County is growing almost as fast as people ages 65 and older.

“If you’re selling a house below $300,000, you could probably sell it in under four days … because all those millennials want them,” he said.

Comparatively, multifamily inventory has gone up considerably more than single family. Between 2010 and now, West Michigan has added 10,000 more multifamily units than single-family units to the market, he said.

“We aren’t building single-family houses. Why? Because we’re out of workers. … We aren’t there right now,” Isely said.

Residential real estate may be a safe investment for the future, but Isely said two recent moves on the federal level could threaten the market.

One of the big indicators Isely said to watch for is the federal tax overhaul, passed in December 2017, which could add up to $1 trillion to the national debt over the next 10 years.

Tariffs are another item to consider. President Donald Trump earlier this month announced the imposition of 25 percent tariffs on imported steel and 10 percent on aluminum, which Isely said likely will lead to an increased cost of those resources by 10 or 15 percent and further push up the cost of new construction.

Isely also argued the U.S. could be hurting even more if the tariffs lead to a trade war, considering the U.S. exports close to $2 trillion in domestic goods, with West Michigan making $5 billion in exports.

“I could buy everybody in the U.S. a new shirt for every day of the week for 10 (Boeing) 747s,” Isely said. “We ship them stuff that is really expensive. They ship us stuff that is really cheap. We make a lot of money on exports. If we get into a trade war, all bets are off.”

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