U.S. Economic Watch:
Q1 GDP Contracts by 4.8%, Signaling Recession;
Fed to Keep Rates Near Zero Until Full Employment Returns

Executive Summary

• GDP fell by 4.8% on an annualized basis in Q1 2020 vs. CBRE’s forecast of -5.1%.
• CBRE expects Q2 annualized GDP be far worse at -42.5%, followed by a rebound starting in Q3—limiting the decline to 4.9% for the full year. Growth of 6.1% is expected in 2021.
• The Federal Reserve pledged to keep interest rates near zero until full employment returns and inflation exceeds 2%.
• Consumer spending fell by 7.6% in Q1 due to stay-at-home orders, closures and uncertainty.
• Gross private domestic investment decreased by 5.6% as businesses reacted to uncertainty and slowing activity.
• Commercial real estate’s recovery will lag that of the economy. The industrial and multifamily sectors are expected to recover within a year, office within two years and retail and hotels within three.

Commercial Real Estate Highlights

• Office: The lockdown significantly impacted business services activities, as service exports (such as insurance) contracted by 21.5%. Due to prohibitions on elective medical procedures, spending on health care decreased by 2.25% in Q1, impacting the medical office sector.
• Retail: Personal consumption expenditures decreased by 7.6% on an annualized basis in Q1. Retailers already weakened by e-commerce and strained balance sheets will struggle to survive, but government support via the Paycheck Protection Program—particularly for smaller food & beverage establishments—should help preserve many retail businesses.
• Industrial: Spending on goods decreased in Q1, which ultimately will impact some near-term demand for industrial space. Nevertheless, increased demand for e-commerce, last-mile facilities and cold-storage space should result in a faster recovery for the industrial sector.
• Multifamily: Sharp job losses will weigh on household formation and affordability. Specialty sectors, including senior housing, student housing and co-living, will face near-term impediments to tenant demand due to social distancing. However, the long-term outlook for all these subsectors is strong. CBRE expects multifamily vacancy to increase this year (see report), but begin to decline in Q4. Rents are forecast to increase in Q1 2021.

Overview

U.S. GDP contracted by 4.8% on an annualized basis in Q1—the sharpest drop since Q4 2008. Although large, this decline does not fully capture the deterioration of economic activity caused by the COVID-19 pandemic. Due to ongoing business closures and stay-at-home orders, CBRE expects Q2 2020 annualized GDP to decline by 42.5%—the largest drop since quarterly records began in the 1940s. As restrictions are lifted and portions of the economy reactivated, recovery should begin in Q3 and result in only a 4.9% decline in GDP for the year.

A strong recovery fueled by pent-up demand and a significant amount of fiscal and monetary support will propel GDP growth to 6.1% in 2021. Some risks to this outlook remain if effective treatments and testing capacities don’t materialize.

Because they tend to lag any economic recovery, commercial real estate fundamentals will not begin to improve until sometime next year. In short, the Q1 2020 GDP report is the harbinger of a brutally sharp downturn that will be more fully apparent in Q2. Economic recovery is expected to begin in the second half of 2020.

Figure 1: U.S. Economic Outlook - CBRE House View (Percentage Changes)

Source: CBRE Research, April 2020.