Drilling Under the Surface: Lower Oil Prices a Boon to Economy and Hiring

December 10, 2014

  • The U.S. economy could get a boost in the fourth quarter as tumbling oil prices support increased consumption and lower costs for manufacturing companies and shipping services. With oil prices down 42 percent since last June to $63 per barrel, consumers save approximately $200 million per day in gas expenses, which may be redirected toward revitalizing holiday shopping following a shaky 2014 Black Friday weekend. The decline in oil prices should re-route money from oil and gas companies to retailers and restaurants – sectors that offer more growth potential for the consumer-driven U.S. economy.

  • Lower oil prices will add momentum to the already strong employment outlook as hiring in retail trade, restaurants and transportation services rises. Energy sector employment, particularly oil and gas extraction, could potentially lose some momentum, but this market segment is relatively small compared with the sectors that will expand. Even in metros with significant energy employment such as Houston, where nearly 5 percent of the employment base is directly tied to the oil and gas sector, hiring momentum should only ease marginally. Houston’s addition of 123,000 positions over the last year was the highest in the nation, and this vibrant city will likely continue to add jobs at a steady pace through 2015.
  • Important factors will be the depth and duration of the lower prices. Prior to the price spike at the onset of the recession, inflation-adjusted oil prices were dramatically lower than they are today. Several newer oil extraction companies are dependent on $80 per barrel prices, and they face heightened risks should oil remain in the $60 range for a prolonged period. However, most drilling and fracking operations remain profitable, and though a prolonged downturn in prices could increase pressure on oil companies, risks remain limited. Considering that much of the pricing pressure has been driven by Saudi Arabia, which also needs the prices closer to the $80 mark, it is unlikely prices will remain low at current levels for a prolonged period.

    Impact on Commercial Real Estate

  • Reduced oil prices offer renters a modest reprieve in their monthly expenses. Lower-income households spend a disproportionate share of their after-tax earnings on energy; approximately 21 percent for households earning less than $50,000 per year. These households, which often rent, will benefit from reduced prices at the pump. In addition, the majority of the jobs that will be created as a byproduct of this change will be in sectors such as restaurants, retail and shipping, positions predominantly staffed by people who favor apartment housing.
  • At least through the holidays, much of the savings that households reap from the lower oil prices will likely go toward retail spending. Though the holiday season got off to a weaker than anticipated start, retailers hope to recover lost momentum in the remaining weeks and achieve their targeted 4.1 percent growth. National retail vacancy fell 40 basis points in the first three quarters of the year to 6.8 percent, and additional tightening in the fourth quarter will place U.S. vacancy at 6.6 percent at year end.

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 weekly 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.

Hiring Sets Aggressive Pace in November; On Track for Best Performance Since 1999

December 5, 2014

  • U.S. employers were in a festive mood in November as the holiday season approached, hiring the most workers in any month in nearly three years. Job creation was deep and broadly distributed, benefiting nearly every sector. Although the unemployment rate remained unchanged, other indicators point to tightened labor market slack. This will place intensified pressure on wages and incomes in the months ahead, potentially leading to a modest increase in inflation that could spur the Federal Reserve to raise its benchmark lending rate in the spring.

  • Private sector expansion merged with government payroll additions to yield a gain of 321,000 jobs last month. The hiring spree brings the 2014 year-to-date total to 2.65 million jobs — already outpacing the total jobs added in any calendar year since 1999. Retailers geared up for an anticipated rush of shoppers, adding more than 50,000 positions last month. The holiday season and the approach of the end of the year led to the hiring of nearly 23,000 temporary workers, largely to support retailers, warehouse order fulfillment and short-term year-end accounting needs. Natural resources and mining was the only sector not to expand, although oil and gas extraction payrolls grew nominally. The steady slide in oil prices has yet to show up in reduced oil production and field staffing.
  • An increase in the labor force prevented the headline unemployment rate from dropping last month. However, the underemployment rate, which measures the unemployed plus individuals working part time for economic reasons and discouraged workers, fell an additional 10 basis points to 11.4 percent. A primary gauge of labor market slack, the underemployment rate plunged 170 basis points over the past year and resides well below the 17.2 percent level posted at the end of the recession nearly five years ago. Further declines will ensue as more workers recognize strengthening job prospects and re-enter the workforce, creating greater momentum for wages and incomes to rise.

    Impact on Commercial Real Estate

  • Financial services establishments added 20,000 workers in November, but 5,500 of the jobs were rental and leasing positions, some of which are involved in the lease-up and management of new multifamily properties. Multifamily construction spending has climbed steadily, but demand also continues to grow vigorously, particularly among younger households. As a result, U.S. apartment vacancy remains on course to end the year at 4.7 percent, 30 basis points lower than last year, as strong demand absorbs the 238,000 newly constructed rentals.
  • Professional and business services staffing expanded by 86,000 workers in November, the largest gain in any sector. The addition of thousands of professional and business services workers is helping to backfill underutilized space in many office buildings and further gains in the months ahead will generate new space needs. This year, U.S. office vacancy will end the year at 15.3 percent, the lowest year-end level since 2008.

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 weekly 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.

October Payrolls Surpass 200,000 for Ninth Month; Tepid Wage Growth Keeps Lid on Inflation

November 11, 2014

  • Employers stared down pre-election anxiety and tensions in the Middle East to significantly expand payrolls in October. Following last month’s hiring, total employment exceeds the pre-recession peak by 1.3 million jobs. With the U.S. economy gathering momentum and the Federal Reserve recently ending its stimulus campaign, the focus will increasingly shift to the timing of the central bank’s initial hike in its short-term interest rate. Inflation pressures have been tame thus far, but should inflationary pressures rise, including wages, the Fed may begin to take action.

Small

  • U.S. employers added 214,000 jobs in October, the ninth consecutive month of payroll gains to exceed 200,000 workers. Consumer-oriented sectors made significant contributions. Traffic at bars and restaurants continued to grow, and hiring at these establishments accounted for 52,000 leisure and hospitality positions in October. Retailers also geared up for the holiday shopping season, adding 27,100 jobs during the month. Th e recent drop in gas prices will potentially supplement consumer spending in the months ahead. Oil and gas companies, though, have not curtailed production despite the fall in prices. Oil and gas extraction payrolls added 2,500 workers last month, and no reduction in drilling is expected unless oil falls below $70 per barrel for an extended period.
  • Labor market slack is easing as employers step up hiring. The unemployment rate slipped to 5.8 percent in October, the lowest level in more than six years, and the so-called underemployment rate also receded dramatically, falling to 11.5 percent. Significant wage gains have yet to accompany the reduction in slack, though, as hourly earnings rose nominally in October and are up barely more than the pace of inflation over the past year. Further tightening in the labor market, however, could pressure wages and potentially cue the Fed to consider raising rates. Most indicators point to the second quarter 2015 for when the Fed will begin to edge rates higher.

    Impact on Commercial Real Estate

  • More than two-thirds of individuals ages 20 to 34 rent apartments, and the employment market for this group continues to improve. Following a drop last month, the unemployment rate for 20- to 34-year-olds sits at 7.5 percent, down from more than 12 percent four years ago when the U.S. economy started adding jobs. New tenants will emerge as additional individuals enter the workforce in the months ahead, maintaining downward pressure on the vacancy rate. This year, the U.S. vacancy rate will decline 30 basis points to 4.7 percent.
  • The movement of goods from U.S. ports to manufacturers, retailers and distributors is supporting a significant increase in transportation and warehouse staffing. Including the addition of 13,300 positions in October, more than 100,000 workers have been hired year to date to handle the stocking and movement of goods. New space needs are also arising in warehouse and distribution properties, keeping the national industrial vacancy rate on course to fall 100 basis points this year to 7.1 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 weekly 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.

Retail Sales Ease Back in September; Broader Economic Momentum Still Advancing

October 15, 2014

  • The softer than anticipated economic news of recent weeks aligned with economic weakness emanating from European and Asian markets to drive investment capital into U.S. Treasurys and other safety vehicles. Recent volatility in the equity markets had already placed investors on edge, and the slight downturn in retail sales together with a decline in a major manufacturing index sent a shock through the stock markets. However, other economic indicators such as employment growth and consumer confidence have demonstrated some durability, offering healthy, if not spectacular, growth outlooks. Furthermore, Treasury rates, now flirting with 2.0 percent, will extend support for the housing market as the Fed potentially hesitates in lifting the Federal Funds rate. Overall, the national economy remains on a growth trajectory despite recent volatility in the equity markets.
  • Retail sales declined 0.3 percent in September as a pullback in store receipts was broad based and impacted nearly every segment of the industry. Although automobile sales declined, per-unit prices inched higher, mitigating the impact of fewer shoppers on car lots. Gasoline prices have retreated 13 percent since the end of June, which generated fewer trips to retailers that sell gas. Core retail sales, which excludes autos and gasoline, dipped 0.1 percent last month. Softness in the housing market dragged down sales 1.1 percent at building materials stores and 0.8 percent at furniture and home furnishing establishments. It should be noted, however, that on an annual basis, retail sales are still up 4.3 percent from last year — on track with the long-term average growth rate.

  • While the monthly retail sales release was weaker than anticipated, some positive signs emerged. Store receipts at electronics and appliance retailers soared 3.4 percent behind the release of the iPhone 6. Nonstore/Internet retailers, which record finalized sales upon delivery rather than the initial transaction, will also likely recoup their 1.1 percent decline posted in September as their iPhone sales predominantly post in October. Restaurants also demonstrated positive momentum, posting 0.6 percent growth and reiterating that discretionary spending remains on track.

    Impact on Commercial Real Estate

  • Although nonstore/Internet retail sales have significantly increased their share of total retail receipts since the recession, bricks-and-mortar retail continues to trend toward pre-recession performance levels. Vacancy will approach the previous low of 6.3 percent by year end, while space demand will finish 2014 at 5.7 percent above the level at the onset of the downturn.

  • Nonstore/Internet retail sales have soared by 60 percent since the recession as buyer behavior has shifted. Most retailers anticipate this trend to be permanent, which is the driving force behind omni-channel retailing. This blend of showroom and stockroom space targets this new shopping experience, and it will lift industrial demand by 2.1 percent this year and help tighten vacancy to nearly 7 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 weekly 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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