The positive vibe in the U.S. economy stemming from robust job gains in January and February has quickly given way to a more subdued tone — at least temporarily. Nonfarm payroll employment rose by 120,000 in March, the Bureau of Labor Statistics reported on Friday, falling well short of the 200,000 figure expected by most economists and raising questions about the strength of the recovery. For starters, is this a case of déjà vu or an aberration?
“The current situation unfortunately harkens back to last year when the job market was gaining momentum, but thanks to a confluence of idiosyncratic factors that imperiled the economy, the labor market weakened beginning in May,” says Ryan Severino, senior economist with Reis, a New York-based commercial real estate research firm. “The situation in 2012 is similar, and because of this we should remain guarded about the outlook for 2012.”
The sovereign debt crisis in Europe coupled with a downgrade of the U.S. credit rating by Standard & Poor’s last summer led to a heightened level of anxiety and uncertainty in 2011, which ultimately blunted the economic momentum. The concern is that rising gas prices resulting in part from escalating tensions in the Middle East, plus the ongoing debt crisis in Europe, could take a similar toll on the U.S. economy in 2012.
Based on the 635,000 jobs created year-to-date through March, the U.S. economy is on pace to create roughly 2.5 million jobs in 2012, says Severino. If realized, that would be a substantial increase over the 1.84 million jobs generated in 2011. “As the fortunes of the labor market and the overall economy continue to improve, this portends slow but steady improvement for commercial real estate.”
The details of the nonfarm payroll employment summary for March pertaining to commercial real estate were mixed, but positive on balance, says Bob Bach, chief economist for Santa Ana, Calif.-based Grubb & Ellis. Among the highlights:
• The sectors of the economy most important for the industrial market — namely manufacturing, wholesale trade, and transportation and warehousing — added a combined 43,900 new jobs in March, down slightly from 52,300 in February.
• The office-using sectors of professional and technical services, information, and finance together added 19,800 new jobs last month, down from a revised 54,000 in February. Much of that decline was in motion picture and sound recording industries.
• The 33,800 retail positions axed last month could be an anomaly related to seasonal adjustment factors and the warm winter, says Bach. Overall, retailers are reporting healthy sales — a positive for shopping center leasing activity.
• The 39,000 new jobs added in leisure and hospitality is a positive sign for the lodging industry.
Highs and lows
The March employment results reflect a marked slowdown in service employment, including outsized cuts in the retail sector, information services, and employment services such as temporary help, says Sam Chandan, president and chief economist of New York-based Chandan Economics. Department store cuts of 21,000 jobs account for roughly two-thirds of the overall retail decline.
“Whether the disappointing March results reflect a short-lived setback or a reversal of recent momentum is debatable,” says Chandan. “The potential for stronger hiring can be found in substantial corporate profits and waning productivity gains.”
In contrast to past months, cuts in government employment had a negligible impact on the March total, amounting to a net drag of just 1,000 jobs, points out Chandan.
The Bureau of Labor Statistics also revised figures to show the U.S. economy added 240,000 nonfarm payroll jobs in February, up from the original estimate of 227,000. Hessam Nadji, managing director of research and advisory services for Encino, Calif.-based Marcus & Millichap, fully expects the job numbers for March also will be revised upward.
“Most importantly, we have to make sure we don’t overreact to monthly volatility,” emphasizes Nadji. “The stock market, corporate sentiment and business investment are still fragile and vulnerable to shifting macro-level concerns. If not Europe, it’s the Middle East and oil prices, so at any given time these headwinds shift sentiment. Structurally, I believe the economy is on a solid track of recovery judging by new unemployment applications, manufacturing orders, imports and retail sales.”
Adjustment overdue?
Rajeev Dhawan, a Georgia State University economist, expects the U.S. to add 1.8 million jobs in 2012, or about 150,000 nonfarm payroll jobs per month on average. Dhawan is in the camp of economists who believe that job growth figures in January (+275,000) and February (+240,000) were running ahead of GDP growth in the first quarter. GDP growth for all of 2012 is expected to be approximately 2.5 percent.
“All the bounce that we had in the winter due to the fair weather is going to get negated in the summer,” says the Atlanta-based economist. Dhawan points out that consumers initially didn’t feel the effects of the spike in gas prices because they were saving on their home heating bills during the mild winter. But the longer gas prices remain elevated, the more likely it becomes that consumers will feel the pinch.
Looking under the hood, the U.S. manufacturing sector gained 37,000 jobs in March, due largely to a resurgent auto industry, but the slowing global economy means that kind of growth isn’t sustainable, says Dhawan. China’s economy is clearly slowing, he points out.
“If you look at the concept of input and output, you start looking at how much electricity China is using, how much rail freight is moving, how much the exports of other countries to China are growing. If those things are slowing, then China is slowing. All those indicators are softening,” says Dhawan.
Uneven U.S. recovery by property sector
The office market remains the biggest laggard because of excess space held by most companies, which they are burning off by growing into it, says Nadji. Industrial and retail are both showing positive momentum and apartments remain the leading sector, he points out.
“The apartment sector continues to benefit from jobs accruing to 20- to 34-year-olds, the prime rental cohort,” adds Severino of Reis. “As long as the economy continues to create jobs for young adults, strength in the apartment market should persist.”
Meanwhile, the hospitality sector gained 39,000 jobs in March compared with 45,000 in February. Within the leisure and hospitality segment, employment in food services and drinking places rose by 37,000 in March and has risen by 563,000 since February 2010.
“Fewer square feet and space efficiency is the name of the game in all product types, and that will structurally reduce demand and prolong the recovery cycle,” says Nadji, referring to the office, industrial, retail and apartment sectors.
“Unless war or some other form of shock sends oil prices to $125 per barrel or higher on a sustainable basis (90 days or more), the recovery will continue,” concludes Nadji, “and commercial real estate will be in a full-fledge recovery in 2013 across the board.”
— Matt Valley