WASHINGTON, D.C. — After disappointing reports by the U.S. Bureau of Labor Statistics in August and September, hiring has surged with employers adding 271,000 new payroll jobs last month, far surpassing the 185,000 jobs forecasted in Bloomberg’s survey of economists. Revisions to the August and September reports were also minor, totaling only 12,000 jobs.
While the hiring surge is positive in many ways for the commercial real estate industry, it may also prove to be a source of negativity, as it is likely to lead to a rise in interest rates.
Many — including Ryan Severino, senior economist and director of research at Reis Inc. — were surprised by the findings in the October jobs report.
“I was surprised not so much that the figure exceeded the forecasts, but by the magnitude by which it exceeded it,” says Severino. “I thought that the disruption of the past couple of months was a blip and this helps to confirm that.”
While the hiring surge is unequivocally positive for commercial property leasing markets, as employers will take on more space to accommodate growing staffs, the report increases the likelihood that the Federal Reserve will raise the short-term federal funds rate — the interest rate at which banks and other depository institutions lend to each other on an overnight basis — when it meets in December, says economist Robert Bach, director of research for the Americas at Newmark Grubb Knight Frank.
If the Federal Reserve does follow suit in raising the short-term federal funds rate, Bach predicts by a quarter-point, subsequent rising interest rates will prove to be a negative for the commercial real estate industry.
The Upside
Of the 271,000 new jobs, professional and business services led with 78,000, a favorable sign for office leasing and absorption. Healthcare and social assistance also added 56,700, maintaining steady growth among service providers, notes Bach.
Retailers created 43,800 new positions in time for holiday spending, and leisure and hospitality added 41,000, with the majority of gains in restaurants and bars. Surging in these categories is, “a good sign for retail landlords,” according to Bach.
An additional 31,000 jobs were created in construction, specifically in the category of commercial hiring. Additions in each of these sectors prove positive for the commercial real estate industry.
“Wage growth also jumped by 0.4 percent last month, pushing year-over-year growth to 2.5 percent, the strongest increase since July 2009,” says Bach. “Higher wages will support consumer spending, which accounts for more than two-thirds of the GDP — a hopeful sign for the economy overall and retailers in particular.”
The Downside
In contrast to the rise in employment across the professional and business, healthcare and social assistance, retail, leisure and hospitality and construction sectors, manufacturing payrolls were flat.
“Restrained by the surging dollar and slow global growth, the mining and logging sector lost 4,000 jobs as oil prices continued to languish and energy companies implemented layoffs,” says Bach.
A potential rise in the short-term federal funds rate could also be a source of negativity for the commercial real estate industry.
“It’s hard to spin rising interest rates as a positive for commercial real estate,” says Bach. “But the industry has had plenty of time to prepare itself, strategically and mentally. Moreover, capitalization rates probably won’t rise in lockstep with interest rates, and the strength of the labor market will support net income, which is likely to mitigate the impact of rising cap rates on property values.”
While the October jobs report does break the lackluster trend in the August and September reports, it does not necessarily mark a turning point.
“I think it signifies that the weakness seen over the last couple of months was transitory and not an inflection point,” says Severino. “I remain relatively bullish on the economy — good, but not great going forward.”
— Katie Sloan