Which Asset Classes Are Poised to Outperform in a Slow-Growth Economy?
Today’s economic environment is shifting in part due to an aging population and lagging productivity growth. This presents long-term headwinds to real gross domestic product, or GDP. Leading indicators are also beginning to suggest recession risk is growing in the shorter term. With that, careful consideration must be given to real estate investment decisions, as sectors are affected differently based on demographic drivers and economic cycles. We believe that real estate sectors dependent on life events are positioned to perform well over the short- and long-term.
Why Does GDP Matter?
A likely range for real GDP growth through 2032 is expected to be 0.75% to 1.75% annually, significantly below the post-war average of 3.1% historically since 1948. Real GDP is loosely summarized as the sum of labor force growth and productivity growth. The only way to increase the production of goods and services is to increase the number of workers or make existing workers more productive – or some combination of the two.
However, the reality is that each of these two components is anticipated to struggle in the coming years.
Declining Workforce Participation
There are expected to be 170.7 million people in the labor force by 2032. Today, there are 161.2 million. Applying a range of potential unemployment rates from 3.25% to 5.7% to the 2032 projection would imply the growth in employed persons will be 0% to 0.25% annually through 2032. For context, the current unemployment rate is 3.9%, and the post-war average is 5.7%.
Obstacles to Advancing Productivity
Rising debt levels and declining investment are presenting challenges for productivity growth. As debt to GDP surpasses 90%, real GDP growth tends to be negatively impacted. Net investment as a percentage of GDP has been declining over time. Without continued investment in equipment, software, etc., it is challenging for workers to become more productive. Long-term, the average quarterly increase in productivity growth was approximately 2.2% annualized. However, this drops to 1.6% growth over the past 20 years, and the average over the last three years is slightly negative. Given trends impacting productivity, we may assume productivity growth going forward of approximately 0.75% to 1.5%.
Add this to our labor force projections, and a reasonable range for real GDP growth of 0.75% to 1.75% can be expected.
Recession Resilient Real Estate
Asset classes like self-storage, healthcare, build-to-rent housing, and student housing have performed well during past economic contractions due to possessing demand drivers that are less linked to economic growth. Life events based on demographics play a more prominent role in these sectors as large waves of the population reach college, first time homebuyer, or retirement age. We see these sectors as poised for outperformance in our current macroeconomic landscape.
Phil McAlister currently serves as senior vice president and head of research at Inland Private Capital Corporation (IPC), where he conducts macroeconomic, submarket, and sector-specific research, in addition to overseeing the underwriting and modeling of potential acquisitions. McAlister has played an important role in the company’s acquisition of more than $8 billion in real estate and has been instrumental in the company’s expansion into self-storage, hospitality, student housing, and senior housing. He received a bachelor’s degree in finance and economics from Elmhurst University.
The views and opinions expressed in the preceding article are those of the author and do not necessarily reflect the views of The DI Wire. Past performance does not guarantee future results.