The slowing pace of job creation is a major concern, says Hessam Nadji, managing director of research and advisory services for Marcus & Millichap, and the end result is that companies will remain conservative in their consumption of commercial real estate space. “Corporate profits continue to grow at a healthy pace, but corporate investment is stagnating.”
Nadji’s comments are in response to the latest nonfarm payroll employment figures released by the Bureau of Labor Statistics last Friday that showed the U.S. economy added 115,000 jobs in April, well below economists’ expectations. The positive news is that the change in total nonfarm payroll employment for February was revised upward from 240,000 to 259,000, and the change for March was revised from 120,000 to 154,000.
Even with the upward revisions, the emerging storyline on the jobs front is that momentum is dissipating, say real estate economists. They believe, however, that the recent softness is partly due to seasonal adjustment factors related to the warm winter.
“The numbers, while disappointing, are strong enough to support the gradual recovery in commercial property demand across all sectors,” explains Nadji of Encino, Calif.-based Marcus & Millichap. “We are seeing a moderate rate of decline in vacancies of retail and industrial space, and a sluggish recovery in the demand for office space unfold. Apartments are fully recovered at the macro level and remain the leader because the demand drivers in that property sector go beyond job growth.”
Office-using employment has grown at a slower clip than total employment, largely because the biggest job gains have been in the education, healthcare and hospitality sectors, says Victor Calanog, director of research at New York-based Reis. Office-using sectors such as financial services remain at an impasse when it comes to hiring or shedding jobs, he points out.
“Yes, the professional services sector has been adding jobs, but these are equally as likely to be based at home versus requiring office space. It is therefore no surprise that office vacancies have only fallen by 40 basis points to 17.2 percent as of the first quarter of 2012,” Calanog says.
Bob Bach, chief economist for Santa Ana, Calif.-based Grubb & Ellis, says the April employment report points to a continuation of the moderate, uneven, less-than-satisfying recovery that has been in place for nearly 3 years. The U.S. economy is still grappling with the aftermath of the Great Recession and the bursting of the bubble in housing and the financial markets, he points out.
By the numbers
The private sector added 130,000 jobs in April. The professional and business services sector added 62,000 jobs, making it the big winner, followed by retail trade (+29,300), and education and health services (+23,000).
The closely watched manufacturing sector gained 16,000, down from 41,000 in March. Employment in temporary help services edged up by 21,100 in April. On the opposite side of the ledger, the transportation and warehousing sector shed 16,600 jobs followed by the 15,000 jobs lost in the public sector.
Meanwhile, the unemployment rate dropped a tenth of a point to 8.1 percent, the lowest level since January 2009. Unemployment dropped for the wrong reason, however, according to Bach of Grubb & Ellis. “The labor force declined by 342,000, meaning that fewer people were actively looking for work or qualified for unemployment insurance. The labor force participation rate dropped a notch to 63.6 percent, the lowest level since September 1981.”
The number of people not participating in the labor force has increased by nearly 3 million during the last year, tempering positive characterizations of the recovery thus far, says Sam Chandan, president of New York-based Chandan Economics. “While hiring in April was reasonably strong in temporary help and health care, financial services and other office-using occupations remain flat.”
Total private average hourly earnings for all employees rose 0.1 percent last month. During the past 12 months, earnings are up by a weak 1.8 percent, but real earnings, adjusted for inflation, are down 0.7 percent.
The U.S. economy has added 3.7 million jobs since February 2010, according to Calanog of Reis, but that’s still about 5 million jobs below the peak in employment reached in January 2008. “At the tepid job growth pace exhibited in April, it would take us roughly 44 more months to reach the previous peak. If we are optimistic and assumed that the year-to-date pace is the benchmark, then gaining back all the remaining jobs would take only 25 months. This seems unlikely,” Calanog concludes.
Given the severity of the recession, commercial real estate has fared “relatively well” during the recovery, Bach emphasizes. A few key factors have helped the situation. “The sluggish leasing market for office, industrial and retail space has been offset by historically low levels of construction, and the weak housing market has funneled households into apartments,” Bach says. “Sustained, rock-bottom interest rates have increased demand for commercial real estate and other asset types offering better returns in exchange for more risk.”
— Matt Valley