Job growth is proceeding at an “agonizingly slow pace,” observes Victor Calanog, head of research and economics for New York-based Reis. This raises the big question: What is the short-term outlook for commercial real estate?
“With the exception of apartments, which are in a full-scale recovery, commercial real estate will follow a similar pattern of gradual improvement in occupancies with meaningful rent growth not emerging until 2013-2014,” says Hessam Nadji, managing director of research for Encino, Calif.-based Marcus & Millichap.
Inside the numbers
The U.S. economy added 80,000 non-farm payroll jobs in October, the Labor Department reported Friday. While that figure was below economists’ expectations of at least 90,000 jobs, the figures for August and September were revised upward by 102,000.
Trade, transportation and utilities led in October with a gain of 35,000 jobs, about half of which were in retail trade; professional and business services added 32,000, including 15,000 temporary positions; education and health services added 28,000 jobs; and leisure and hospitality gained 22,000.
Average weekly hours were unchanged at 34.3 and average hourly earnings rose 0.2 percent in October.
The latest job figures coupled with recent news that U.S. gross domestic product expanded at an annualized rate of 2.5 percent in the third quarter has helped greatly reduce concerns about the U.S. falling back into recession.
Still, the economy has regained only 2.3 million of the nearly 8.8 million jobs cut during the downturn. What’s more, the unemployment rate has been at 9 percent or higher for the past seven months.
The uncertainty surrounding the outcome of the European sovereign debt crisis coupled with the U.S. political gridlock over how to cut the federal budget deficit are two major factors holding back a more aggressive economic expansion cycle, Nadji believes.
“Until Europe truly installs a systemic solution to its debt problems and the U.S. runs through its election cycle, economic growth will remain barely above stagnation status,” emphasizes Nadji.
Chief economist Bob Bach of Santa Ana, Calif.-based Grubb & Ellis believes that the slow-growth outlook for the U.S. economy remains intact.
“For commercial real estate, it implies continued low interest rates, good investor demand, and weak but sustained leasing activity — generally not strong enough to push rents higher in the near term,” says Bach.
Expect 2012 to look a lot like 2011, says Calanog of Reis. He predicts that the multifamily sector will continue to perform well overall due to strong renter demand that should generate higher net operating income for owners. The national apartment vacancy rate in the third quarter stood at a healthy 5.6 percent.
Office and retail outlook
Calanog expects the office vacancy rate in 2012 to decline ever so slightly from its current unhealthy level of 17.4 percent. The office sector absorbed a total of 16 million square feet nationally during the first three quarters of 2011, he points out, so that’s a positive.
To put that figure into context, however, consider that it was not out of the ordinary for the office sector to absorb that much space in a single quarter in 2004 and 2005.
The U.S. economy has added 550,000 professional and business services jobs in the past year, points out Nadji of Marcus & Millichap. “Companies still have excess office space to burn off, and that is why net absorption will be meager until at least mid-2012.”
Meanwhile, retail vacancies will continue to remain high, predicts Calanog, as the sector digests continued store closures and a supply glut associated with the gamut of retail properties built during the housing boom.
The October jobs report was a mixed bag overall, concludes Bach of Grubb & Ellis. “It is consistent with other recent indicators — retail sales, the ISM indexes, GDP and factory orders — showing that the economy has skirted a recession, defying abysmal consumer confidence and fears of financial contagion. But neither does it suggest that growth is accelerating.”
— Matt Valley