Tepid September Jobs Report Still Has Upside for Commercial Real Estate Industry

WASHINGTON, D.C. — The Federal Reserve’s recent decision to delay any increase in short-term interest rates appears to have been the correct call in hindsight based on last Friday’s disappointing news that total U.S. nonfarm payroll employment increased by only 142,000 in September, says economist Robert Bach.

But the lackluster September jobs report released by the U.S. Bureau of Labor Statistics (BLS) also complicates the Fed’s task of communicating its plans to the financial markets, adds Bach, director of research for the Americas at Newmark Grubb Knight Frank.

“Fed Chairman Janet Yellen recently stated she thought the Fed might still raise interest rates this year, but that is less plausible if the economy remains in a soft patch,” explains Bach.

The Federal Reserve’s target for the fed funds rate — the interest rate at which banks and other depository institutions lend to each other on an overnight basis — has been between 0 and 0.25 percent since December 2008. The fed funds rate serves as a baseline for other interest rates.

Robert Bach, Newmark Grubb Knight Frank

Robert Bach, Newmark Grubb Knight Frank

Ryan Severino, senior economist and director of research at New York-based Reis, says that based on the latest jobs data “we are probably looking at December, if not 2016,” before the Fed raises short-term interest rates.

Is that good news for borrowers? “The easy answer is to say ‘yes’ because rates might be lower, but not raising rates hurts confidence as well,” says Severino.

The Upside
The combination of steady but unspectacular job growth and measured construction activity supports tighter leasing market fundamentals, which is good news for commercial real estate.

“Interest rates are likely to remain low a while longer, making commercial property attractive to yield-hungry investors,” emphasizes Bach.

September’s net gain of 142,000 payroll jobs, including 118,000 in the private sector, is well below the 200,000 jobs forecasted in Bloomberg’s survey of economists. In addition, the July and August employment totals were revised lower by a combined 59,000 jobs.

“I was more than a little surprised. I had forecast 190,000 net new payroll jobs in September,” says Bach. “The labor market has decelerated in the last two months, a victim of slowing global growth and the strong dollar.”

Severino also was surprised by the tepid September jobs report, especially the downward revisions to the July and August totals. “That wasn’t expected,” he says.

Shopping Centers Are Big Winners
The job sectors important to commercial real estate have held up reasonably well, emphasizes Bach. Retail and food services, for example, added a combined 44,400 jobs last month, on par with the category’s six-month average, as job creation, rising home prices and low gas prices supported consumer spending, says Bach.

Office employment — professional and business services, financial activities and information — performed reasonably well, gaining 43,000 jobs in September, although the sector was about 20,000 shy of its six-month average.

Severino says it is encouraging to see solid job growth in the professional and business services segment. “Those are the better-quality jobs that we need to keep creating in order to keep the economy and real estate going.”

While industrial employment was weighed down by the loss of manufacturing jobs, the growth of retail and e-commerce trade is supporting demand for distribution centers, according to Bach.

The leisure and hospitality sector added 35,000 jobs in September, while professional and business services gained 31,000. Meanwhile, education and health services added 29,000 jobs, and retailers created 23,700 new positions.

Some softness in certain job sectors was also evident in the latest figures. Mining shed 12,000 jobs last month, as energy prices continued to languish, Bach points out. Manufacturing lost 9,000 jobs, a victim of the strong dollar and weak exports.

Construction, however, reported employment gains of 8,000, slightly above its six-month average and a sign of strength in the housing and commercial property sectors.

Other Noteworthy Trends
Wage growth remained mired in its post-recession rut in September, with no change last month and a tepid gain of 2.2 percent over the past year.

The unemployment rate was unchanged at 5.1 percent, but the decline in the labor force more than offset a decline in the number of people working. The U-6 rate, a better measure of slack in the labor force, fell from 10.3 percent to 10 percent, its lowest level since May 2008.

The labor force participation rate fell from 62.6 percent to 62.4 percent, a new low for the current cycle and its lowest level since October 1977.

While the September jobs report was an unpleasant surprise to many economists, Severino says the underlying economy remains sound. “Short-term fluctuations like this always occur.”

— Matt Valley

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