The combination of continued solid employment growth and low inflation/interest rates has created a “sweet spot” for commercial real estate, concludes Robert Bach, director of research for the Americas at brokerage firm Newmark Grubb Knight Frank (NGKF).
“The economy is strong enough to generate sustained leasing activity for all property types, but still has enough slack to permit the Federal Reserve to maintain low interest rates — a key factor supporting the surge of investor demand for commercial real estate assets,” according to Bach.
The veteran economist’s insights were outlined in a research note following last Friday’s news that employers added 214,000 net new payroll jobs in October, according to the Bureau of Labor Statistics (BLS). The increase, which marked the ninth consecutive monthly gain above 200,000 new jobs, was in line with economists’ expectations.
Additionally, the BLS revised the August and September totals higher by a combined 31,000 jobs. The average monthly increase year-to-date through October is 229,000, up from 194,000 in 2013.
The unemployment rate fell one-tenth of a point to 5.8 percent, its lowest level since July 2008, but the tightening is not translating into higher wages, according to Bach.
“Wage growth remains slow — a negative for wage earners and consumer spending, but a positive for the inflation outlook,” wrote Bach. “The labor market continues to grow at a solid, non-inflationary pace. Growth has been remarkably consistent, showing little sign of accelerating in recent months.”
The average hourly earnings for all employees rose by 0.1 percent in October and by 2 percent from a year ago.
“Weak wage growth has restrained both the pace of economic expansion and the rate of inflation, prompting the Federal Reserve to keep interest rates low,” wrote Bach.
Other highlights in the October jobs report:
• Leisure and hospitality led all sectors with a gain of 52,000 jobs, concentrated mostly in restaurants.
• The education and health services sector was second, adding 41,000 jobs. Of this total, 24,500 were in healthcare despite ongoing efforts by providers to trim costs.
• Professional and business services came in third, with 37,000 jobs created in October. The other two big office-using sectors were mostly flat, as finance added 3,000 jobs and information subtracted 4,000, the only major sector to lose jobs in October.
• The goods-producing sectors fared well, pointed out Bach, with manufacturing and construction adding 15,000 and 12,000 jobs, respectively. Besides manufacturing, the other two big sectors driving demand for industrial space also performed well, as transportation and warehouse employment increased by 13,300 and wholesale trade added 8,500.
• Retailers increased payrolls by 27,100, which Bach described as “a vote of confidence in the holiday shopping season.”
• The public sector added a modest 5,000 jobs, with gains in local government employment offsetting losses at the U.S. Postal Service.
• The U-6 rate, a broader measure of unemployment that includes discouraged, marginally attached and underemployed workers, was 11.5 percent, down from 13.7 percent a year ago.
— Matt Valley