Commercial Real Estate Shines amid Increased Volatility

August 25, 2015

  • The recent surge in global uncertainty kicked off by China’s currency devaluation and a rapid decline in the Chinese stock market sparked a plunge on Wall Street, driving the S&P 500 lower by nearly 10 percent over the last week. The ensuing flight to safety tightened yields on the 10-year Treasury dramatically, pushing returns to the 2 percent range.
  • The stock market turbulence reflects global uncertainty rather than U.S. economic performance, which remains positive as indicators including employment and consumption continue to deliver solid results. Commercial real estate has benefited from this steady economic momentum while limited development has restrained supply risks. The competitive yields offered by this sector reiterate commercial real estate’s compelling benefits amid global volatility.
  • The Fed may reconsider the timing of a rate increase in light of the surge in global uncertainty
    together with the ensuing equity market drop, falling energy prices and tame inflation. Although the Fed must eventually raise rates, recent events could postpone Fed action until its December meeting or even into 2016. A September increase is not completely off the table, but recent volatility will likely inspire additional caution.
  • Global challenges including China’s slowing economy, rising signs of weakness in emerging
    markets, and continued European fiscal issues remain the greatest risks to the U.S. economy.
    Contagion could erode business and consumer confidence, in turn slowing job growth and retail consumption. Though these risks remain unlikely at this stage, they still warrant additional caution as U.S. markets adapt to international influence. Notably, even as international uncertainty creates instability for many investment classes, commercial real estate remains well-positioned to withstand short-term shocks due to sturdy demand drivers and limited supply risks.
  • Commercial real estate yields still reflect sound fundamentals and steady demand drivers. Vacancies have tightened for all major property types over the last year and rent growth remains robust. With performance indicators reflecting a positive outlook, investor activity has risen, and commercial real estate transactions could potentially surpass the record levels of 2006.

The Research Brief blog from Marcus & Millichap offers timely insight and expertise into the rapidly changing investment real estate industry. The Research Brief is published by top industry professionals, showcasing time-sensitive information and valuable analysis. Add the Research Brief blog to your reading list today.

The information contained herein was obtained from sources deemed reliable. Every effort was made to obtain complete and accurate information; however, no representation, warranty or guarantee to the accuracy, express or implied, is made.

Steady July Hiring Meets Expectations; Raises Prospects of Fed Rate Increase Despite Modest Wage Growth

August 12, 2015

  • Employers continued their steady hiring in July, which marked the 58th consecutive month of job gains. Cumulatively, the U.S. has added 12.4 million jobs since the recovery began, and total employment stands 3.7 million positions above the pre-recession employment peak. Despite month-to-month volatility, the trends have been remarkably sturdy, generating average monthly additions exceeding 200,000 jobs. This consistent performance offers the Fed a solid foundation to begin modestly raising rates later this year, despite some soft readings in measures such as wage growth.

  • U.S. employers added 215,000 positions across a broad array of private-sector industries in July, including retail companies. Trade employment added 60,000 workers, predominantly at shopping malls and stores. Despite a strong U.S. dollar that limits exports, manufacturers rallied from a lackluster first half of the year to create 15,000 posts last month. Auto sales were also strong in July, and the ongoing replacement of older vehicles by consumers will sustain payrolls at vehicle and parts factories in the coming months. Oil and gas activities, however, remain a drag on the labor market. A fall in oil prices to less than $50 per barrel in July contributed to the loss of 4,000 jobs in natural resources and mining, the only private employment sector to trim payrolls last month.
  • Average hourly earnings rose 0.2 percent last month following a flat reading in June, culminating in a modest 2.1 percent advance from one year ago. Conditions supporting more substantial increases continue to align, however. The number of workers quitting jobs, presumably to take higher-paying positions, is near a post-recession high. Additionally, the unemployment rate of individuals in their prime earnings years, ages 35 to 54, has compressed to around 4 percent. The thinning pool of experienced workers will place additional pressure on wage trends.
  • Non-store retailers, including Amazon, comprise a modest portion of total retail employment but remain a potent growth engine; they have expanded 4.7 percent year to date, or by 24,000 workers. A reduced reliance on physical retail outlets is expanding requirements for fulfillment centers and contributing to growth in the industrial property sector. Nationwide, tenants moved into an additional 54.4 million square feet of industrial space in the second quarter to shave vacancy 10 basis points to 6.9 percent, the lowest level in 14 years. Additional demand growth and a modest expansion of stock will further reduce vacancy this year and underpin average rent growth of 5.3 percent.
  • Rental housing continues to benefit from the employment gains as well, while the subdued pace of wage growth has suppressed the migration to homeownership. In the second quarter, the homeownership rate fell to 63.4 percent, its lowest level since 1967. Reflecting this trend in preference for rental housing, the U.S. apartment vacancy rate tumbled 40 basis points in the second quarter to 4.1 percent, its lowest level since 2006. Expected job gains through the remainder of the year combined with positive demographic trends should support continued absorption and elevated rent growth through the fourth quarter.

The Research Brief blog from Marcus & Millichap offers timely insight and expertise into the rapidly changing investment real estate industry. The Research Brief is published by top industry professionals, showcasing time-sensitive information and valuable analysis. Add the Research Brief blog to your reading list today.

The information contained herein was obtained from sources deemed reliable. Every effort was made to obtain complete and accurate information; however, no representation, warranty or guarantee to the accuracy, express or implied, is made.

Broad-Based May Job Gains Highlight Economic Strength; Rising Momentum Raises Potential of Fed Tightening

June 8, 2015

  • Hiring in May spotlighted a U.S. economy that is finding its footing and gathering momentum following the weather-induced lackluster results of the first quarter. With the jump in job creation last month and upward revisions to prior months, growth in U.S. payrolls is back on track to align with last year’s robust pace. Higher employment levels, evidence of a more substantial pace of wage growth and broadening economic strength are converging to keep the Federal Reserve on course to raise its benchmark short-term interest rate by the end of 2015.

  • U.S. employers added 280,000 positions last month, including 262,000 new hires in the private sector. With these gains, total employment is 3.3 million jobs above the pre-recession peak. Not all employment sectors have contributed to the growth, however, as construction payrolls are still 1.1 million lower than their pre-downturn peak, but new residential and commercial projects have begun to pick up. Government and manufacturing jobs also face substantial deficits from prior levels, whereas education and health services expanded throughout the economic downturn, adding nearly 3.1 million positions. The shale oil boom lifted natural resources and mining staffing, but so far this year the sector has lost 68,000 jobs due to lower oil prices.
  • The unemployment rate ticked up to 5.5 percent last month, but the tightening in labor market slack over the past year is supporting the Federal Reserve’s intent to raise interest rates. While slack has been absorbed by the overall labor market, disparities between specific segments of the population have sharpened. The unemployment rate for 20- to 24-year-olds, for example, jumped to 10.1 percent last month, underlining the persistent difficulties young workers face in starting careers. At the other end of the age scale, older workers are remaining in the workforce longer to build retirement savings, as evidenced by growth in the labor force participation rate of the 65-years-plus segment and this group’s unemployment rate of 3.2 percent.

    Impact on Commercial Real Estate

  • The continuing inability of the youngest parts of the population to find work and form households represents a source of untapped demand for rental housing. Despite the modest contribution from 20- to 24-year-olds, the U.S. apartment sector is nonetheless flourishing. Demand is growing, but with completions rising to 250,000 units this year, the national vacancy rate will increase 10 basis points to 4.8 percent.
  • Among the employment sectors that have far surpassed their prior peak, professional and business services payrolls are 1.6 million workers above the previous high point in U.S. employment. Further growth in payrolls, plus a greater contribution from financial services employment, is beginning to translate into more significant reductions in the U.S. office vacancy rate. This year, minimal completions and growing demand will slice the U.S. vacancy rate 80 basis points to 14.5 percent.

The Research Brief blog from Marcus & Millichap offers timely insight and expertise into the rapidly changing investment real estate industry. The Research Brief is published by top industry professionals, showcasing time-sensitive information and valuable analysis. Add the Research Brief blog to your reading list today.

The information contained herein was obtained from sources deemed reliable. Every effort was made to obtain complete and accurate information; however, no representation, warranty or guarantee to the accuracy, express or implied, is made.

April Hiring Revives Following Severe Winter; Job Creation Raising Commercial Real Estate Demand

May 11, 2015

  • Solid additions to payrolls in April put the U.S. labor market back on track and eased concerns that may have arisen following the poor hiring results in March and a weaker than anticipated initial reading of GDP. The further tightening of the labor market and the likelihood that economic growth will accelerate as 2015 progresses will likely encourage the Federal Reserve to raise its benchmark lending rate in the fourth quarter this year. In the meantime, low interest rates and subdued inflation will continue to support consumers’ spending power and will underpin a respectable pace of economic growth in the months ahead.

  • U.S. employers added 223,000 jobs last month, including 213,000 positions in the private sector. Most private-employment sectors accelerated hiring in April from the prior month, a trend exemplified by the creation of 45,000 construction jobs following staff cuts in March. Warmer weather allowed developers to initiate several projects, elevating multifamily development from its already strong pace, and sparking additional office, retail and lodging building. Professional and business services employment also grew by 62,000 positions in April; workers have been added each month for the past five years. Manufacturing payrolls have been flat for the past two months as exports were curtailed by the stymied West Coast port activity and the strong dollar. However, rising factory orders may lead to increased hiring.
  • The U.S. labor market is tightening, drawing down the overall unemployment rate to its lowest level in nearly eight years in April, to 5.4 percent. The underemployment rate that counts part-time workers seeking full-time positions continued to tighten, slipping to 10.8 percent, also a post-recession low. A shrinking pool of the unemployed, however, has yet to translate to substantial wage growth, with the average hourly wage in the private sector up a nominal 2.2 percent year over year through April. Wages have grown an average 1.9 percent over the past two years, but a faster pace of growth will slowly manifest over the coming year.

    Impact on Commercial Real Estate

  • Retailers created more than 12,000 positions in April, about half of the total recorded in the preceding month. The retail sector still has not received a significant bump from the lower gas prices that have persisted throughout this year, although a recent increase in credit-card debt suggests that consumers may be loosening up. Despite the missing surge in consumption, the retail sector continues to log solid performance, with U.S. vacancy forecast to tumble 60 basis points this year to 6.0 percent. Completions will total just 47 million square feet and will be inadequate to meet retailer needs, so an upswing in development may finally be forming.
  • Steady employment gains are sparking the formation of new households and sustaining the vigorous performance of the U.S. multifamily market. This year, national vacancy will edge up to 4.8 percent as 250,000 new units marginally outpace net absorption. Approximately half of the construction will be in 10 key metros, which could face short-term vacancy increases, but other markets will see little slowing.

The Research Brief blog from Marcus & Millichap offers timely insight and expertise into the rapidly changing investment real estate industry. The Research Brief is published by top industry professionals, showcasing time-sensitive information and valuable analysis. Add the Research Brief blog to your reading list today.

The information contained herein was obtained from sources deemed reliable. Every effort was made to obtain complete and accurate information; however, no representation, warranty or guarantee to the accuracy, express or implied, is made.

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