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Although the unemployment rate in July fell two-tenths of a percentage point to 7.4 percent, the lowest in four years, the 162,000 increase in total nonfarm payroll employment left some of the leading real estate economists unimpressed.

Adding to the partly cloudy outlook, the U.S. Bureau of Labor Statistics (BLS) revised the total employment gains for May and June, resulting in 26,000 fewer jobs created than previously believed. Furthermore, the labor force participation rate fell slightly from 63.5 percent in June to 63.4 in July.

To gain a better understanding of the impact of the jobs report on commercial real estate, interviewed three real estate economists – Bob Bach of Newmark Grubb Knight Frank, Rajeev Dhawan of Georgia State University and Ryan Severino of Reis.


Unemployment Rates: A Red Herring

None of the three seasoned economists put much stock in the unemployment number, which, while lower than it has been in recent memory, is largely offset by the decrease in the labor force participation rate.

“Let me put it this way: The unemployment rate is not the right thing to look at for the health of a market these days. End of the story,” says Dhawan. “To know how the market is doing, you need to look at what type of jobs were created and how many, not a month-to-month change in the unemployment rate, because that’s absolutely useless for telling you how the market is doing.”

Bach concurred that the relationship between the national unemployment rate and the health of the commercial real estate industry is overstated.

“It’s not the unemployment rate that should concern the commercial real estate industry, it’s the rate of job growth,” says Bach. “Although July’s 162,000 gain in nonfarm payroll employment was a disappointment, the average monthly increase year-to-date is 192,000, versus 183,000 in 2012 and 175,000 in 2011. So, the labor market has been picking up slowly – not as fast as landlords would like, but slow enough to keep interest rates low, which pleases investors.”

Breaking Down the 162,000

The sectors with the biggest gains included retail (+46,000) and food services and drinking places (+38,000). Consumers are becoming more comfortable with the idea of spending their money, says Severino.

“Restaurants are one of the few tenant types that have been expanding over the last few years. This is due to a couple of key factors,” Severino explains. “First, eating out and going to drinking establishments are experiences that cannot be replicated online or at home. The second reason is that during such a weak recovery, with many households cutting back on discretionary spending considerably, this is a rather minor luxury as compared to going on vacation. So, households have continued to do this in lieu of spending on more expensive leisure activities.”

Meanwhile, manufacturing employment grew modestly in July (+6,000) and has expanded little over the past 12 months, according to the BLS. There’s a fairly simple explanation for the relatively small job gains in the manufacturing sector, according to Dhawan: Global demand has been tepid.

“What’s happening in the rest of the world? Europe is in a recession, and China is stalled,” says Dhawan. “The Middle East is iffy, and emerging markets have slowed down. The rest of the world has slowed, and that’s why our manufacturing demand has slowed and manufacturing employment is not increasing that much.”

Bach echoes these sentiments. “The short-term answer is that exports have been weak,” he says. “The long-term answer is that manufacturing is not a source of job growth. Manufacturers have been substituting capital for labor for the past 30 years – the definition of greater productivity. They had to do this to survive the offshoring of jobs and entire industries to lower-cost countries. The spurt we saw beginning in 2010 was an anomaly.”

Implications for Property Markets

The property type that will benefit the most from the July jobs report, according to Severino, is the apartment sector. “As the labor market continues to create jobs, especially lower-wage occupations, it will support continued demand for apartments.”

Bach, however, sees the situation differently. With the job growth unevenly spread across the labor markets, multifamily may not see the boost some had hoped.

“Apartment demand benefits from job creation broadly versus a single labor sector,” says Bach. “So, this month’s report probably disappointed apartment landlords, since it fell short of both expectations and recent averages.”

Dhawan considers the entire practice of linking job growth numbers to commercial real estate a thing of the past. There is a correlation between the two, but it is not as direct as it once was.

“In the real estate industry in the early 2000s, you’d see the job numbers and start [predicting] how much commercial, office and industrial space would be created,” he says.

However, it’s more difficult to draw that conclusion today, Dhawan emphasizes.

“It’s the quality of jobs that matters for the real estate industry, not the number. In the old days, pre-2000, a set amount of job growth meant a set amount of real estate growth. That is not true anymore because today a lot of people work from home, a lot of temp jobs are being created.”

– John McCurdy

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