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As stated, we expect rent growth to be the primary driver of future price appreciation. The prospects for rent growth rely heavily upon the fundamentals of the U.S. economy, which continues to outperform most of the developed world. Economic conditions impact property supply fundamentals, such as construction levels, as well as factors that drive demand for commercial properties. We look at three areas that will drive rent levels going forward: GDP growth, the labor market and construction activity.

Q1 GDP clocked in at 3.1% annualized, a robust number that beat most estimates. However, under the surface, this number was less encouraging as growth in inventories and a shrinking of the trade deficit, both somewhat transient factors, contributed more than half of total GDP growth. Final sales to domestic purchasers, our preferred gauge of domestic demand, grew just 1.3%, the lowest since 2013.1 Trade tensions have cast further doubt over global growth.

The labor market continues to look solid, with unemployment at its lowest level in five decades and wage growth finally breaching 3% in 2018 for the first time in this expansion. Payroll data may be moderating somewhat with two sub-100K months during the first half of the year – not unexpected given the extremely tight labor environment.2 We expect the labor market to continue to support a healthy consumer, which has been the key driver of this expansion and a crucial factor for rent growth.

Construction spending has been uneven for much of this cycle, which has helped drive price gains as demand has outstripped new supply. After a mild uptick in 2018, nonresidential structures investment grew just 2% year over year as of Q1 2019.1 Input costs will be a top story for the rest of 2019, as a tight labor market has pushed construction worker compensation upward. Meanwhile, materials price growth has moderated but remains above expansion averages.2 We will be watching whether developers see the market as attractive enough to warrant new investment.

1 Bloomberg, BEA, as of March 31, 2019.
2 Bureau of Labor Statistics, as of May 31, 2019.

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