Reading the Tea Leaves: What the Leading Economic Forecast Is Predicting for Orange County in 2016

Economic forecasts, while rarely spot-on, are useful tools for analyzing industrial property market trends.

Market metrics like Gross Absorption, Net Absorption, Vacancy, Lease Rates, and Sales Prices are all impacted by many factors including GDP, employment & wage growth, cost of capital, and consumer spending, among others.

We believe it’s a good idea to periodically get to a higher altitude and look at some of the macro factors impact real estate decision making that we may not see as well from our boots-on-the-ground perspective. Let’s look at what a prominent 2016 orange county economic forecast has to say about our future.

For many years, Chapman University’s highly respected A. Gary Anderson Center for Economics has published forecasts for the Orange County, California and the US economies.

In its most recent report, the faculty presented a forecast that we found interesting and deserving of comment as it relates to industrial property market performance.

Economic Growth in Orange County

First, the report predicts continued economic growth at all three levels, but also sees that growth moderating in 2016. Job growth in Orange County, for example, is expected to reach 41,000 jobs in 2016, as compared to 47,000 jobs in 2015.

That’s still robust growth, but the pace is slower.

Fewer jobs generally means lower net absorption of industrial space. California is expected to generate 50,000 fewer jobs in 2016, but still produce a respectable 402,000 new positions. Since each new job generates new income, consumer spending growth will be impacted. However, wage growth throughout the state is expected to grow above the rate of inflation, which will be a positive offset.

Job growth is expected in most major employment sectors with construction, business services and healthcare services leading the way. Industrial absorption should be directly impacted by the rise in construction spending, while the other categories will favor growth in the office sector.

Interest Rates

Second, and of some concern to us, is the forecast for a 150 basis point rise in short and long term interest rates by this time next year.

If that comes to pass, it will cause a significant increase in occupancy cost for businesses that purchase their own facilities and increase the cost of capital for all aspects of business expansion, including the hiring of new workers.

Low interest rates have been the primary driver of double-digit appreciation in industrial property values over the past several years.

Assigning Meaning

So, a significant spike in rates could change the current trajectory, and raise concerns of a market correction. That could move some buyers to the sidelines, but could also bring more badly needed inventory to the market as some owners become sellers to exit the market before a potential change in market direction.

We believe that even with higher rates, the sale market will remain active.

The good ol’ days of cheap money, however, may be numbered.

We are keeping a close eye on these a variety of other market metrics so that we can help you make informed real estate decisions. Give us a call. We are here to help.