By Scott Reid
The U.S. labor market has been remarkably consistent in its unremarkable performance, observes Robert Bach, director of research for the Americas with Newmark Grubb Knight Frank, following last Friday’s announcement by the Bureau of Labor Statistics (BLS) that total nonfarm payroll employment rose by 217,000 in May.
“Growth has been strong enough to chip away at the slack in the supply of labor, but not strong enough to reverse the cautious psychology that persists among households and some businesses,” wrote Bach in a June 6 research note titled “Back in the Black.”
With the 217,000 net new payroll jobs created in May, the U.S. labor market finally recovered all of the 8.7 million jobs lost to the Great Recession. The national unemployment rate remained unchanged at 6.3 percent, the lowest level since September 2008.
“A welcome milestone, it is also a sobering reminder that the labor force has grown by 1.7 million workers since the recession began with virtually no new jobs created for them to fill, which has kept the unemployment rate above the long-term equilibrium rate of 5.5 percent,” said Bach. “These totals do not count millions more who have dropped out of the labor force because they can’t find work.”
The good news for commercial real estate, according to Bach, is that the leasing markets continue to recover and rents are rising, albeit at a slow pace. Meanwhile, the low interest rates are expected to continue to fuel investment activity.
May marked the fourth consecutive month that employers added more than 200,000 jobs.
The BLS also revised total jobs gains in April from 288,000 to 282,000, 6,000 lower than originally reported. The March total was unchanged at 203,000.
Among the job growth highlights for May:
• The three primary office-using sectors — information, finance, and professional and business services — added a combined 53,000 jobs, on par with the six-month average of 53,800. Bach expects the gradual recovery in the office leasing market to continue.
• Employment sectors related to demand for industrial space — manufacturing, transportation and warehousing, and wholesale trade — added 36,300 jobs. Most commercial real estate experts expect the industrial vacancy rate, which has returned to its pre-recession level, to fall further in coming quarters.
• Leisure and hospitality added 39,000 jobs, up from the six-month average of 28,300, signaling an extremely healthy lodging industry.
• Retailers added 12,500 jobs, down from the six-month average of 19,900. Retail employment remains 257,000 short of its pre-recession peak, a sign of the ever-growing shift of sales onto the Internet, Bach points out.
• Education and health services added 63,000 jobs in May, of which 33,600 were in the health care subsector, reflecting demand for medical office buildings and related facilities. This is more than double the six-month average of 15,900 new health care jobs, a sign that providers are expanding to serve newly insured customers.
• Construction added a modest 6,000 jobs while government added 1,000 jobs.
Meanwhile, average hourly earnings rose 0.2 percent in May, bringing the 12-month increase to 2.1 percent. Bach describes that increase as “a disappointment considering slow wage growth has held back the pace of the recovery.” Average hours worked was unchanged in May.
The private service-provider sector, which includes industries such as information, finance, and professional and business services, added 198,000 jobs. According to Bach, “The outlook is good enough for private-sector employers to add staff at a moderate pace to take advantage of opportunities for growth presented by the economy.
“You can only cut staff so many times before you start to limit your business’s profit potential,” he says.
The addition of the private service sector jobs is causing an increase in construction activity for office buildings. The vacancy rate in office buildings has declined 12 consecutive quarters, down from 16.8 percent in the first quarter of 2011.
The pace of recovery, however, is limited by “slow growth of financial industry jobs — a bellwether of occupier demand for office space,” says Bach. “Banks are restructuring and limiting risk to adhere to Dodd-Frank [finance reforms],” more officially known as the Dodd–Frank Wall Street Reform and Consumer Protection Act signed into federal law in 2010.
Drilling Down on the Numbers
Ryan Severino, senior economist and associate director of research at New York-based Reis Inc., has been encouraged by the healthy job growth in the business and professional services category during the past several months. Severino did point out, however, that job growth in this particular employment category in May was a modest 55,000, compared with 71,000 in April. “So, we shouldn’t get too excited just yet,” he says. “In reality, we will need to see many more months like this, if not better, before we start to see any sort of meaningful impact on office space.”
Bach says the 36,000 jobs added to the labor force in industrial sectors were due to the two biggest drivers of occupant demand for industrial space: “the ongoing reconfiguration of corporate supply chains and the migration of retail sales from stores to the Internet.”
“The two are related because the latter trend, by definition, changes the flow of goods through supply chains,” he says.
Lodging Shines, Retail Remains Choppy
Hotel demand is enjoying one of the strongest recovery cycles in its history, Bach says, due to sustained demand and only moderate levels of construction.
Severino adds that corporate travel is still outpacing leisure travel because many households are not yet in a position to be traveling. Business travel has definitely recovered, he says. “Flights and hotels in business-oriented markets are booked pretty solid these days.”
One previously strong sector, retail, has ebbed somewhat, gaining 12,500 jobs in May. “I wouldn’t be too concerned about that,” says Bach. If you average the 43,100 jobs added in April and the 12,500 in May, 27,800 jobs were created, a figure close to the prior 12-month average of 28,300. Still, he says, “retail hiring remains under pressure from the long-term secular trend of sales migrating to the web.”
The Big Picture
Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University’s Robinson College of Business, says that strong job growth, rising home prices and continued stock market appreciation are promising, but globaltensions and lack of business spending are causes for concern.
In his Forecast of the Nation, released May 29, he writes the following: “You might assume that we are back in the late 1990s when we looked to the future with great anticipation, but I see quite a few differences between now and then. Among the differences: extremely low interest rates and a disinflationary environment. Executives and policymakers want to know when rates will rise, as evidenced by the questioning of Federal Reserve chair Janet Yellen when she testified before the U.S. Congress Joint Economic Committee earlier in May.”
Precipitous declines in export growth are also contributing to tempered expectations. “Exports represent foreign demand for our goods, and as such, they are a reflection of our trading partners’ economic health, which is iffy to say the least,” he writes.
Dhawan’s concerns will be alleviated when “we witness consistent growth in all GDP categories, including exports, and that can happen only when our trading partners are back on their feet and our businesses are investing, which leads to sustained hiring.” Dhawan also says the Federal Reserve won’t move on interest rates until it has concrete evidence that business investment growth is here to stay.
Dhawan’s Economic Predictions
The U.S. Department of Commerce initially reported that real GDP rose only 0.1 percent on an annualized basis during the first quarter of 2014 due in part to harsh winter weather. The report was later revised downward to show the economy actually contracted by at an annual rate of 1 percent during the first quarter.
Dhawan expect real GDP to rebound to annualized growth of 3.7 percent in the second quarter, and he projects GDP growth of 2.2 percent for all 2014. Furthermore, the veteran economist is forecasting GDP to rise 2.5 percent in 2015 and 2.9 percent in 2016.
Other notable projections by Dhawan:
• Business investment will grow by 3.7 percent in 2014, 5.1 percent in 2015 and 6.5 percent in 2016. Expect an average of 196,000 new jobs per month in 2014, 186,000 per month in 2015 and 203,000 per month in 2016.
• Housing starts will average 0.953 million units in 2014, rise sharply to 1.223 million units in 2015, and increase further to 1.323 million units in 2016. Auto sales will average 15.5 million units in 2014, and increase slightly to 15.6 million units in 2015 and 15.7 million units in 2016.
• The 10-year Treasury yield will rise to 3.6 percent by the end of 2014 and not cross 4 percent until mid-2016.