Yellen’s steady GDP growth prediction is good for commercial REITs
The Fed’s overall view of the economy
In her prepared remarks, Yellen addressed the state of the U.S. economy:
- “The economic recovery gained greater traction in the second half of last year. Real gross domestic product (GDP) is currently estimated to have risen at an average annual rate of more than 3-1/2 percent in the third and fourth quarters, up from a 1-3/4 percent pace in the first half.”
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Yellen mentioned how much housing has contributed to the economic turnaround. House prices are increasing, which is repairing household balance sheets and reducing the number of underwater homeowners. This increases consumer spending and also increases consumer confidence. Second, the rise in home prices is creating jobs in the construction sector, which is reducing unemployment.
The Fed’s forecast for economic growth is that GDP will begin to accelerate in the second half of this year, eventually reaching a pace of 3.0% to 3.4% by the end of 2015. This should be enough to reduce unemployment to between 5.8% and 6.2% by the final quarter of 2015.
The increase in economic growth is due to the belief that the effects of fiscal policy will exert somewhat less drag over time as the effects of the tax hikes and spending cuts diminish. The FOMC (Federal Open Market Committee) also believes that a number of risks that were prominent last year—specifically Europe, household balance sheets, the fiscal positions of state and local governments, and business balance sheets—have all improved markedly over the past year. The FOMC does caution that the economy is vulnerable to external shocks, and particularly that global growth may turn out lower than anticipated.
Finally, Yellen mentioned the global macro environment and said the Fed is watching overseas developments:
- “We have been watching closely the recent volatility in global financial markets. Our sense is that at this stage these developments do not pose a substantial risk to the U.S. economic outlook. We will, of course, continue to monitor the situation.”
Impact on commercial REITs
Commercial REITs like Simon Property Group (SPG), General Growth Properties (GGP), Realty Income Corp (O), and Kimco Realty (KIM) are highly sensitive to economic growth—especially consumption. The Fed is anticipating that the economy will continue to recover while, at the same time, interest rates will remain low. Increasing economic growth can be a double-edged sword for REITs, as growth drives traffic but also increases borrowing costs as interest rates rise. Investors should also consider investing in the sector via an ETF like the Vanguard REIT ETF (VNQ)