The nation’s jobless rate dipped to 9.7% in January from 10% the month before, catching many economists by surprise, as predictions were for unemployment to actually rise to 10.1%. But analysts warn that trends within the government’s new report indicate a rough road ahead for commercial real estate, particularly for apartment and office properties.
The report by the U.S. Department of Labor reveals a loss of 75,000 construction jobs in January. Many of the declines occurred in nonresidential construction and specialty trades, points out Sam Chandan, global chief economist at New York-based research firm Real Capital Analytics. “These are areas of construction that are highly correlated with activity in commercial real estate development and building.”
Robert Bach, senior vice president at brokerage Grubb & Ellis, calls the construction job declines “the biggest drag on payroll employment.” However, he cautions that unusually cold weather across the country in January may have affected the pace and job requirements of construction.
Since the start of the recession in December 2007, payroll employment has fallen by 8.4 million.
“As expected, the January figures follow the rollercoaster pattern that typifies labor markets in transition,” says Victor Calanog, director of research at New York-based data firm Reis. The encouraging news is that the heavy job losses, prevalent a year ago, seem to have moderated, he says. “The hemorrhage appears to have been contained. What I'd like to see is a reversal in the continued rise in the number of discouraged workers.”
The category of discouraged workers includes those who are not currently looking for work because they believe no jobs are available for them. Discouraged workers numbered 1.1 million people in January, up from 734,000 12 months ago.
“The commercial real estate and multifamily [industry] depends critically on employment,” says Chandan. “We need meaningful, sustained gains in employment before we can expect a stabilization of trends in real estate fundamentals. I think that’s still a way off.”
Apartment market suffers
One group that concerns Chandan is the rising number of people aged 20-24 who are unemployed. “The labor market for young heads of households remains weak,” he says. Young adults are overwhelmingly renters, but because of the lack of jobs and income, many of them are moving in with parents or roommates instead of renting their own apartments.
“We’ve got young people that are graduating from college, from graduate school, from law school, basically new entrants to the workforce. These new entrants are not finding employment,” says Chandan. “As long as young people are not finding jobs, demand for apartments will be weak.”
Another aspect of the jobs report that affects commercial real estate is the decline in state and local government payrolls, says Chandan. State and local governments create jobs in the public sector for teachers and other professions and in the private sector when they hire consultants.
In turn, the employees and consultants stimulate the retail, apartment and office markets as they spend money on goods and rent apartments or office space. When government payrolls decline, the demand for commercial real estate space also falters.
“Budget shortfalls [are] something that we’ll see in a more significant way over the course of the next year,” says Chandan. “These state and local payroll cuts can have a significant impact on demand for space.”
Two surveys, two results
Although the national unemployment rate, developed through a survey of American households, showed a monthly decline, another government survey of U.S. businesses actually registered a net loss of 20,000 jobs in January. There is a simple explanation for the apparent paradox of a loss in payroll jobs at the same time that the unemployment rate improved, according to Bach.
“Payroll employment and the unemployment rate are derived from two different surveys,” he says. “The Current Employment Statistics (CES) survey covers 140,000 business and government worksites to derive payroll employment, hours and earnings while the Current Population Survey (CPS) covers 72,000 households to derive unemployment and other characteristics of the labor force. The two surveys don’t always move in lockstep.”
Many analysts believe the household survey is better at capturing changes in the labor force early in a recovery because it includes the self-employed, an important source of employment as laid-off workers start up new businesses, adds Bach.
Signs of recovery
For the commercial real estate industry, the fact that the current unemployment numbers are far less severe than those of a year ago, reflecting fewer losses, should provide encouragement, implying that more good news may lie ahead, the economists conclude.
“The new job numbers, indicating flat employment over the last quarter, with some increase in hiring for temporary workers and retail trade, are consistent with what we expect to be a modest rise in household formation as the employment outlook gets less bleak,” says Calanog of Reis. “That will help apartment properties. Global economic expansion and stabilizing labor markets also solidify our expectation that industrial properties may recover by the end of this year or early next year.”
As for his outlook for office and retail properties, the economist is waiting for a sign of improvement. “Until we see consistent job gains posted at the national level, we won't see significant increases in leasing activity that support rent growth.”