The revision downward in fourth quarter GDP from 3.2 percent to 2.8 percent last week and continuing high unemployment just reinforces the underlying reason for this lackluster recovery: the 35 percent of the economy’s assets comprised of the built environment (real estate and the infrastructure that supports real estate) is M.I.A.
Exports are rising at a swift pace in line with the president’s call to double exports in five years, corporate profits and cash are near record levels, and American strength as a high tech leader is actually expanding with the launch of new hardware (e.g., Apple’s iPad and iPhone) and software (e.g., social networks dominated by American companies). We need much more export growth, of course, especially in manufacturing.
The missing presence of real estate and infrastructure, together the largest asset class in the entire economy, is the major reason we are bumping along between 2.5 to 3.0 percent growth. This is not enough to create sufficient employment, allow government coffers to recover, or for the United States to maintain its standing in the world. Infrastructure investment, which anyone paying attention knows, is woefully inadequate.
We have major deficits in the most important transportation infrastructure required to succeed in the 21st century knowledge economy, rail transit. It is hoped the delayed federal transportation bill will be passed this year and let metropolitan areas build the types of transportation system they want and need, rather than state government dithering with business as usual approaches. Rail transit is as important to the 21st century economy as roads were to the last half of the 20th century economy. Since transportation drives development, until we encourage rail transit, we will continue to stay in this depressed level of economic growth. Denver, Salt Lake, Phoenix, Washington, Los Angeles, St. Louis, Seattle and many other metro areas are massively expanding their rail transit systems on their own nickel, giving up on federal leadership and funding.
The real estate industry is actually just beginning to show signs of a thaw, lead by a significant increase in rental apartment building permits, reflected in the latest monthly numbers. However, the best news is that many mixed-use, walkable urban developments, many in the suburbs, are being dusted off and financed. These will be the focus of most development over the next real estate cycle and will give transit planners places to connect-the-dots. There is huge pent-up demand for these new and expanded walkable urban places and my numbers show it will take a generation to catch up, which will put a solid foundation under the economy for years. This will be especially good for the employment of the worst hit groups of workers; high school or less educated, manual, construction workers, many of whom are minorities.
The recovery did not have to be this slow. The prejudice against real estate, the fundamental cause of the Great Recession, has lead policy makers to shun it like the plague. It was the overbuilding of the wrong product in the wrong location that caused the Great Recession. The building of the right product in the right location will finally add some zip to this recovery.