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Borrowers with a low cost of capital are living the dream. The yield on the 10-year U.S. Treasury note fell four basis points to close Friday at 1.96 percent, helping to keep borrowing costs at historic lows for well-qualified commercial real estate investors and underscoring the point that U.S. Treasuries remain a safe haven in an uncertain world.

A slowly improving U.S. economy combined with a weak outlook for the financially troubled Euro Zone continues to draw capital to the United States, according to Sam Chandan, president of New York-based Chandan Economics and professor of real estate at the Wharton School of Business.

“This was evident on Friday as the dollar improved and the 10-year yield fell following the release of the December jobs report.” The 10-year yield dipped below 2 percent for the first time ever in August 2011 and has been hovering near or below that level since.

The Bureau of Labor Statistics reported Friday that nonfarm payroll employment in the U.S. grew by 200,000 in December and that the national unemployment rate fell from a revised 8.7 percent in November to 8.5 percent in December. The private sector added 212,000 jobs, while government cut 12,000 workers.

But the improving U.S. economy hasn’t diminished investors’ strong appetite for U.S. Treasury bonds, and such high demand is helping suppress the 10-year Treasury yield.

Jobs outlook remains a mixed bag

Despite the broad-based job gains in several key areas such as health care, manufacturing as well as transportation and warehousing, office-using employment trends remain disappointing, says Chandan.

Year-over-year employment in information services is down more than 1.3 percent and financial services employment has been basically flat over the last year, says the veteran real estate economist. What’s more, the outlook for financial services is mixed.

“Layoffs at several large institutions, uncertainties regarding the implementation of Dodd-Frank [financial reforms], and questions about the Consumer Financial Protection Bureau are significant considerations in our stress testing of office-using employment and related net absorption,” says Chandan.


A spike in courier and messenger employment (+42,000) accounted for nearly 20 percent of the total job gains in the private sector in December. “The large increase is partially attributable to the growth in online retail sales, but it may not survive into the January report,” explains Chandan. “The seasonally adjusted data could show an offsetting decline in courier and messenger employment in the January accounting.”

On the bright side, job gains in non-residential construction and specialty trades (+20,000) were more than expected, which may be a function of better than expected weather. In the service industries, employment increased measurably in wholesale and retail trade (+39,500 combined), education and health services (+29,000), and leisure and hospitality (+21,000).

Long road ahead

Victor Calanog, head of research and economics for New York-based Reis, describes the December jobs report as “heartening.” The U.S. economy created 1.64 million nonfarm payroll jobs in 2011, or about 75 percent more than the relatively paltry 940,000 jobs generated in 2010, says Calanog. Economic growth gathered steam in the fourth quarter, with GDP potentially growing at close to a 3 percent annualized rate.

“Still, we face a long, treacherous road ahead,” points out Calanog. “Even if the economy created 200,000 jobs per month starting this January, we would still need about two-and-a-half years to recover the more than 6 million jobs that we need to make up.” That’s because in 2008 and 2009, the U.S. labor market shed 8.4 million jobs.

“External threats remain, most precarious of which is the European debt crisis,” emphasizes Calanog. “And if political gridlock continues to hamper effective decision-making in the government, market uncertainty will continue to prompt businesses to remain cautious about hiring plans.”

What’s the outlook for commercial real estate against that backdrop? “We expect 2012 to be slightly better than 2011, with multifamily continuing to do very well, and office and retail posting more consistent signs of a recovery in real estate fundamentals,” says Calanog.

If returns from equities and other asset classes continue to remain volatile, investors could continue to favor high-end commercial real estate that offers both relative safety plus a decent yield, he says.

Transaction volume may remain relatively low, but high-end properties that do trade will probably benefit from rising valuations, Calanog concludes. “Tertiary markets and/or lower-quality properties, however, will remain bereft of investor interest.”

— Matt Valley

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