February 25, 2019
2018 has been one of the best years for the U.S. economy, with the U.S. gross domestic product rising at an annual pace of 3.5% in the third quarter and at 4.2% in the second quarter, according to the Bureau of Economic Statistics. The economy performed better than forecasted at the beginning of the year, as consumers spent more, companies invested in inventories, and local governments maintained their spending. Most economists expect the economy to weaken in late 2019/early 2020 from the impact of tariffs and the withdrawal of stimulus. We expect the Fed to act, and the economy to recover shortly after. GDP is expected to fall in the second half of 2019 and in the first quarter of 2020, but looks to recover by the end of 2020. As for the U.S. Economy, the real estate market activity exceeded expectations in 2018, with investment and corporate occupier demand surpassing 2017 totals and ending the year at their highest levels since 2007. However, there were signs in the final quarter that demand is softening; investment and leasing volumes were lowering year-over-year and this trend is likely to continue into 2019. The self-storage industry continues to benefit from long-term demographic factors, including the aging of the millennial generation. The 80 million strong population cohort represents a little less than a third of all non-commercial self-storage renters. That proportion is likely to rise as the leading edge of the demographic group enters their primary income-earning years. The migration of jobs to small cities is creating a new demand for storage in secondary and tertiary markets creating a new opportunity for development in those markets. More self-storage adaptive facilities with smaller unit floor plans and new technologies will be built to cater the new millennial demand. The construction pipeline will remain high, putting pressure on rents and vacancies, which is important for all the new developers to track each market closely. The office trends that were expected to take place during Q4 2018 are likely to begin in earnest in Q1 2019. Large-scale relocations in gateway markets from a greater number of rightsizing and consolidating users are going to catalyze further flight to quality, place further pressure on Class B as well as non-Trophy Class A vacancy and push concessions beyond their already high levels. The compression of effective rents in primary geographies will open up additional options and leverage for tenants. The demand for flexible spaces will continue to increase, creating additional demand for co-working and executive suite operations that provide additional amenities to tenants and the right technology to ensure a great consumer experience.