It’s premature to pop the champagne cork, say real estate economists, despite a healthy report from the Bureau of Labor Statistics showing that the U.S. economy added 243,000 nonfarm payroll jobs in January. A number of factors could still hamper the pace of employment growth, they believe.
“While it is dangerous to extrapolate from a single month’s worth of data, the report suggests that the U.S. economy is building momentum despite headwinds to growth, which include a mild recession in the euro zone, a slowdown across much of the globe, rising home foreclosures and public sector layoffs,” said Bob Bach, chief economist for Santa Ana, Calif.-based Grubb & Ellis.
The outlook for the economy and the real estate lending climate figures to be a hot topic at MBA’s Commercial Real Estate Finance/Multifamily Housing Convention and Expo taking place in downtown Atlanta early this week. More than 2,200 industry professionals have registered for the event, which runs through Wednesday at the Marriott Marquis.
The private sector generated 257,000 jobs in January, while the public sector slashed 14,000 jobs, according to the Bureau of Labor Statistics. Analysts had expected nonfarm payroll employment to rise between 125,000 and 150,000, or about half the gains actually realized.
Employment growth in January was the best since April 2011. What’s more, the Bureau of Labor Statistics revised the number of jobs created in November and December upward by a combined 60,000.
The job gains in January were broad based, led by professional and business services (+70,000), manufacturing (+50,000) and leisure and hospitality (+44,000). Even the moribund construction sector added 21,000 due to unseasonably warm weather across much of the country, according to Bach.
Appearances can be deceiving
The unemployment rate fell by 20 basis points in January to 8.3 percent, the lowest level since February 2009.That’s partly because the labor force participation rate continues to fall, rendering the highly touted decline in the unemployment rate “woefully misleading,” says Sam Chandan, president of New York-based Chandan Economics.
More than 2.5 million Americans dropped out of the work force during the past year, emphasizes Chandan, which means they are no longer counted among the ranks of the unemployed. The proportion of the population either working or seeking work fell from 64.2 percent to 63.7 percent during the past year and is down from 65.7 percent in January 2009.
Chandan also is concerned thatthe number of long-term unemployed (those jobless for 27 weeks or more) was little changed at 5.5 million in January and accounted for 42.9 percent of the unemployed.
“The share of long-term unemployed people is near its historic high, far exceeding anything observed in U.S. postwar history, or within the sustainable capacity of the social safety net,” emphasizes Chandan.
Investor ramifications
Interestingly, a stronger economy may prove to be a double-edged sword for commercial real estate investment, says Victor Calanog, head of research and economics for New York-based Reis. “The furor surrounding trophy properties in gateway cities may die down, if other asset classes like equities draw investors away from the supposed relative safety of Class A buildings, and cap rates may begin to rise.”
Demand for multifamily properties could wane slightly, if more people opt to buy a home rather than rent, points out Calanog. Even so, “improved prospects for labor markets and the overall economy will serve as a larger rising tide, lifting more ships,” he adds.
Buoyed by the prospects of technology firms, the Nasdaq Composite closed at an 11-year high last Friday on Wall Street. If January’s pace of job recovery could be sustained, the country would gain close to 3 million jobs in 2012, up from 1.82 million in 2011, according to Calanog.
“Politically it would also deprive Republicans of a potent weapon against the incumbent president: the opportunity to blame him for an ailing labor market,” says Calanog.
Downside risks remain, however, particularly when it comes to domestic finances, adds Calanog. “Automatic tax hikes and spending cuts will come into effect by the end of 2012, if Congress remains paralyzed.” How the European debt crisis ultimately plays out also is a big unknown that could affect the U.S. economy.
Fear subsides
Hessam Nadji, managing director of research and advisory services, for Encino, Calif.-based Marcus & Millichap, says that he is beginning to see fear easing in the marketplace and companies taking on more risk.
“Our view going back to August 2011 was that the macro issues — the European debt crisis and the downgrade of the U.S. debt — would not kill the recovery, but would keep the growth rates artificially low until some resolution or reduction of fear emerged,” says Nadji. “This has materialized so far, as measured by better than expected jobs, retail sales and manufacturing data.”
Nadji predicts that 2012 will be a better year than 2011 on the job creation front, but not by much. “We expect 2.2 million jobs versus the approximate 1.8 million jobs created last year. That is not stellar, but certainly good enough to keep commercial occupancy levels rising gradually.”
The projected job numbers bode well mostly for the industrial and retail sectors, says Nadji, with office still lagging until the second half of 2012. “Apartments, of course, are still in the lead.”
Demand for space in the office sector has lagged other commercial real estate property types partly because of the abysmal performance of the financial services sector, according to Chandan. The financial services industry shed 5,000 jobs in January, and employment growth in that category has essentially remained flat over the past year.
“While January’s job gains overall are the best results since last April,” says Chandan, “we still have a long way to go.”
— Matt Valley