Accelerating employment losses in June portend further softening in demand for commercial real estate in the second half of 2008. The nation sustained a net loss of 62,000 non-farm payrolls in June to punctuate six consecutive months of contracting employment, according to preliminary data from the Bureau of Labor Statistics.
The employment report’s overall data masked more severe losses in industries that drive demand for commercial space, according to Sam Chandan, chief economist at real estate research firm Reis.
“Job losses in professional and business services are relatively much larger than the overall declines,” Chandan says. “We can see a similar situation for goods-producing sectors, including construction and manufacturing.”
Manufacturing, another demand driver for commercial real estate owners, racked up 33,000 job losses in June and would have been greater if not offset by employment gains in motor vehicles and automotive parts, which edged up 6,000 over the previous month.
Those gains in the automotive industry are likely anomalous, however, and largely reflect the return of striking workers and others put out of work during recent plant shutdowns, according to the Bureau of Labor Statistics. Over the past 12 months, manufacturing has lost 353,000 jobs.
Construction was the loss leader in June with 43,000 job losses; since its peak in September 2006 construction employment has fallen by 528,000. While the construction industry has only a limited direct impact on demand for office and industrial space, it serves as a barometer on economic activity.
Not surprisingly, the greatest construction job losses have occurred on the residential side. Government data shows residential building employment fell 11% in the past year with the loss of 345,000 jobs, while non-residential construction employment fell by 106,000 or 2.4% over the same period.
The commercial construction business may be healthier than it appears, however. Ken Simonson, chief economist for the Associated General Contractors of America, believes non-residential construction employment has risen about 9% since June 2007, contrary to the 11% drop reported by the Bureau of Labor Statistics.
Based on a 27% decline in residential construction spending, Simonson believes roughly 500,000 former residential construction workers are now working on commercial projects, but are labeled residential workers because their employers haven’t changed their filing status to commercial.
“Such an increase could also explain why average hourly earnings in construction rose more than for all private production and nonsupervisory workers — 3.7% vs. 3.4% — from June 2007 to June 2008,” Simonson says. In another positive sign for nonresidential construction, architectural and engineering services added 3,000 jobs in June and rose by 34,000, or 2.4% over the past 12 months.
Absorption may already be suffering from the combined effects of a slowing economy and job losses among office-using companies. Office users have been leasing up properties at a slowing rate since the second quarter of 2007 and absorption recently turned negative, according to Property & Portfolio Research. The Boston-based market researcher tracked national office absorption at a negative 4.2 million sq. ft. in the second quarter this year.
Job losses in June were partially offset by gains of 29,000 in education and health services, another 29,000 in government payrolls, and 24,000 in leisure and hospitality. Overall job declines are projected to continue into 2009, according to Reis.
On the bright side, the nation is unlikely to experience the degree of job losses that followed the recession of 2001 because U.S. companies have maintained lean employment roles in recent years. “The baseline expectation,” Chandan says, “is that the size and duration of these declines will be more manageable than during the protracted period of job losses that began with the recession of 2001 and persisted into 2003.”