U.S. Economic Watch:
GDP Grows by 33.1% in Q3

Executive Summary

• U.S. GDP grew at a 33.1% annualized pace in Q3, just ahead of consensus expectations of 32%.
• On a quarter-over-quarter basis, GDP grew by 7.4% after declining by 9.0% in Q2.
• CBRE expects Q4 GDP growth will moderate to 3.9% on an annualized basis (1.0% quarter-over-quarter).
• Increases in output were broad across consumer and business categories, except for nonresidential structures and government.
• CBRE expects commercial real estate’s recovery will lag that of the broader economy. Industrial properties have been most resilient, followed by multifamily. The office, retail and hotel sectors will take longer to fully recover, likely toward the middle of the decade.

Figure 1: U.S. GDP History & Forecast

Source: CBRE Research. Bureau of Economic Analysis.

Commercial Real Estate Highlights

• Office: There was strong growth in the services sector, which fuels demand for office space. There was some variation in intellectual property performance with software (tech) up slightly but R&D down slightly. Overall, we expect that office demand will begin to recover in 2021 once a proven vaccine is widely distributed and allows for office space to be safely reoccupied.
• Retail: Personal consumption expenditures increased by 40.7% on an annualized basis in Q3, strongly supported by the government stimulus package. Strong growth in both durable and nondurable goods indicates broad-based improvement across retail sectors. However, a lack of additional government support could temper growth in Q4 and in Q1 2021.
• Industrial: Strong consumption fueled growth across categories. Industrial & logistics is benefitting not just from this dynamic, but also strong growth in e-commerce. As such, it has proven to be the most resilient commercial real estate sector during the pandemic. The outlook for the sector remains bright as the economy recovers and higher e-commerce sales are expected to persist beyond the pandemic.
• Multifamily: Although the economy is growing again, there are some residual effects from the sharp downturn in Q2 that will weigh on multifamily. Elevated unemployment and a lack of additional government aid continue to weigh on household formation and affordability. Yet structural issues, such as housing shortages in many areas and enhanced unemployment insurance, limited the erosion of multifamily fundamentals. Single-family home sales are near record levels in major suburban areas. Challenges associated with mobility and density are significantly impairing CBD multifamily demand. There is some additional risk if policymakers fail to provide additional aid for households affected by the pandemic. Specialty sectors, including seniors housing, student housing and co-living, will continue to face impediments to demand until a proven vaccine is distributed, but the longer-term outlook for these sectors remains strong.

The Bottom Line

Economic growth resumed in Q3 at a record annualized pace of 33.1% as government stimulus and easing lockdown allowed a surge in consumer spending.

CBRE expects that GDP growth will moderate in Q4 2020 to 3.9% on an annualized basis (1.0% on a quarterly basis) with the flare-up in COVID-19 and the delay in additional government stimulus as headwinds. However, there will be enough economic momentum to prevent a double-dip recession. With a vaccine likely widely available in the spring, growth will pick up strongly again. But until then, there will be a lull in growth before the full recovery begins in 2021.

Commercial real estate fundamentals will lag the economic rebound by several quarters and vary by property type, with the exception of the industrial sector, which has hardly broken step. Multifamily will see some near-term headwinds as unemployment assistance declines, but structural strength and a cyclical recovery will aid the sector. The office recovery will not begin in earnest until people are back to working from their offices and there is clarity on the long-term extent of remote working.

Sustainable recovery in retail and hotel fundamentals will also depend on a medical solution. Pharmaceutical companies appear optimistic that a vaccine may be approved before the end of this year and widely distributed in 2021.

In short, recovery for most commercial real estate sectors—aside from industrial and multifamily—will not start in earnest until 2021. A full recovery in demand for the office sector is not expected until late 2022, and not until 2024 for retail. Hotels should see a full recovery in demand by late 2023.

Figure 2: U.S. Economic Outlook - CBRE House View (Percentage Changes)

Source: CBRE Research, October 2020.