Landlords across property types are in for a nasty decline in tenant demand for space, thanks to an accelerating employment drop, researchers say. U.S. non-farm payrolls shrank by 533,000 jobs in November, the Labor Department reported on Dec. 5.
“No sector is exempt, and virtually every metropolitan statistical area in the country will feel the effects,” says Hugh Kelly, principal of Brooklyn-based consulting firm Hugh Kelly Real Estate Economics. “I expect leasing velocity to stall completely in the next few months, with absorption for all commercial property sectors running negative.”
Job losses in the last three months alone have totaled more than 1.25 million, the Labor Department reported. In light of November’s unexpectedly heavy losses and upward revisions to 403,000 job losses in September and 320,000 in October, researchers say projections of commercial real estate demand will certainly be revised downward.
“U.S. companies are shedding jobs at the fastest rate since the early 1970s,” says Victor Calanog, director of research at commercial real estate researcher Reis.
Indeed, November’s employment decline is the largest for a single month since the loss of 602,000 jobs in December 1974, according to James Smith, chief economist at Asheville, N.C.-based ParsecManagement. That loss occurred only four months before the end of that recession in March 1975, Smith says, pointing to a potential light at the end of the recessionary tunnel next spring.
“The same is likely to be true this time unless a burst of Christmas shopping — which seems to be developing, thank goodness — means this month is the trough,” Smith says, “which is definitely possible.”
Employment losses spread across industry sectors pushed the unemployment rate to 6.7% from 6.5% the previous month. In September, October and November, monthly job losses averaged 419,000, much steeper than the average loss of 82,000 per month from January through August, Bureau of Labor Statistics Commissioner Keith Hall told a joint economic committee on Dec. 5 in Washington, D.C.
The November labor report portends hard times ahead for commercial landlords. In the first eight months of this year, job losses were concentrated inand manufacturing, according to Hall’s testimony. Since the end of August, however, about two-thirds of job declines have occurred in the service-providing sector of the economy, which is a key driver of demand for office space.
The nation has eliminated approximately 748,000 office-using jobs so far this year, with 187,000 job cuts in November alone, according to Hessam Nadji, managing director of research services at Marcus & Millichap. “The virtual shutting down of the commercial paper market in October was most likely a significant factor,” Nadji says. “Many small to mid-sized companies rely heavily on short-term financing to run their operations and were badly stressed.”
Researchers say the office and retail sectors are being lambasted by job cuts that will reduce demand for commercial space over time. “Last month’s job losses confirmed the fears that more retail and office-using jobs are being eliminated in reaction to the broadening of the recession,” Nadji says.
Absorption of neighborhood and community shopping center space has been negative for the past three quarters, according to Calanog at Reis. This is the first year that Reis has recorded negative quarterly absorption in that sector.
In its third-quarter forecast, Reis projected that the national office vacancy rate would increase to 14.5% by the end of 2008 compared with 13.7% in the third quarter. Furthermore, the researcher predicts another 100 basis points of deterioration to 15.5% by the end of 2009. While Reis hasn’t yet updated its numbers, the recent surge in unemployment will require an adjustment to vacancy rate expectations, Calanog says. “Downside risks — because of these employment numbers — will push that number upwards,” he says. “We expect continued weakness through 2010.”
The national office vacancy rate could reach 18% before it begins to ebb in 2010, predicts Ben Breslau, director of research at full-service real estate firm Jones Lang LaSalle. It is more difficult for companies to adjust their real estate footprint than their headcount, he says, so recent job cuts will show up gradually in real estate absorption. Breslau expects office sublease offerings to accelerate in many markets as overall vacancy rates increase.
When will the nation stem the flow of hemorrhaging in the labor market? Not for at least a few more months, economists say. Michael Niemira, research director at the International Council of Shopping Centers, had projected a 2.5% contraction in gross domestic product for the fourth quarter but now plans to adjust that prediction for an even greater economic contraction.
That means substantial job losses still ahead, Niemira says. “I have believed, and continue to believe, that only about a third of the employment correction is at hand. There are more adjustments to come, and weak consumer demand will linger.”