Hiring Steady in First Quarter Despite Headwinds; Supports Broadening Demand for Real Estate

April 6, 2015

  • Following months of robust gains, U.S. employers tempered hiring in March. The modest pace of job creation, though, is consistent with slower economic growth in the first quarter that partly reflects a strong U.S. dollar, harsh winter weather and the shutdown of West Coast ports. Other economic trends, however, indicate that the slowdown in hiring will be only a temporary setback and the economy will regain momentum over the remainder of 2015. Last month’s hiring will also ease pressure on the Federal Reserve to raise its benchmark lending rate in the immediate term.

  • U.S. employers created 126,000 jobs last month, entirely in the private sector. A slower pace of expansion, and not widespread layoffs, accounted for the moderation in hiring. Bars and restaurants, for example, after adding nearly 66,000 in February, throttled back to just 8,700 workers last month. New bar and restaurant openings appear to be leveling off after climbing over the past four years, indicating potentially slower growth in the months ahead. Retailers continued to add to staffing last month following February’s 4.5 percent gain in core retail sales, though retailers’ pace of hiring moderated to 25,900 positions in March. Three sectors shed workers last month, led by a loss of 11,000 positions in natural resources and mining related to the idling of oil and gas rigs. Manufacturers and builders also trimmed payrolls nominally.
  • Although hiring slackened last month, more than 3.1 million jobs were created over the past year and average hourly earnings also increased. Inflation-adjusted disposable income, a broader measure of purchasing power, is also up 3 percent from one year ago, providing a substantial lift to households that will translate to greater spending and near-term economic growth. Recent indicators of growing consumer confidence include a rise in pending sales of single-family homes. Sales of single-family homes often lead to greater spending as homeowners purchase new furniture and appliances. Consumers also continue to buy other long-lasting goods in greater numbers.

    Impact on Commercial Real Estate

  • Additional trips to the mall and shopping centers by consumers will continue to support a strong retail property market and contribute to steady hiring in retail trade. U.S. retail vacancy was 6.6 percent at the end of 2014 and new store openings will trim the rate further this year, to 6.0 percent, behind net absorption of nearly 88 million square feet. Completions will total only 47 million square feet, but additional multi-tenant space may be required after 2015 to accommodate the expansion plans of national chains and other in-line retailers.
  • Professional and business services employment also continues to grow, with employers adding 40,000 workers last month. All told, primary office-using employment sectors including professional and business services added 871,000 positions over the past year, contributing to an increase in occupied space in the U.S. office sector. Minimal construction will divert additional rises in space demand to existing properties this year, underpinning net absorption of 107 million square feet and slicing vacancy 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.

Hiring Escalates Amid Heightened Corporate Confidence; Job Openings Surpass 2007 Peak

February 18, 2015

  • The number of job openings in the U.S. recently surpassed its pre-recession peak and reached a 14-year high as employers accelerated hiring, culminating in a robust month of job creation in January. Momentum has been broad as corporate caution has finally relaxed and companies have started to funnel profits back to work in the form of investments in equipment and additions to staff. Inexpensive gas prices and particularly low interest rates will sustain economic growth in 2015 and lend additional momentum to the positive hiring trends

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  • The private sector led hiring last month, and despite a modest reduction of government staff, the economy added 257,000 jobs. New employment was diversified, with substantive gains in both the education and health services, and trade, transportation and utilities sectors. Manufacturing also made headway, with durable-goods producers hiring 18,000 workers in January. Consumer purchases of long-lasting items such as automobiles are rising and will sustain manufacturing activity. Leisure and hospitality staffing expanded by 37,000 workers, primarily at bars and restaurants. Overall, hiring has been remarkably steady with the combined total of the last three months exceeding 1 million jobs — the first time that has happened since 1997.
  • Falling oil prices, a boon to the broader economy as consumers pay less to fill gas tanks, weighed on natural resources and mining employment. The sector lost 3,000 workers last month, with losses concentrated in oil and gas extraction, and drilling support activities. Should the price of oil remain low, companies will likely decommission more rotary rigs following last month’s shutdown of 200 facilities. U.S. oil production, however, remains elevated compared with years past, a trend that will persist in the near term as producers work their most cost-effective wells.

    Impact on Commercial Real Estate

  • Retailers hired nearly 46,000 employees last month as consumption maintained momentum. Retail job openings have reached an all-time high, signaling additional store openings in the coming months as retailers step up the pace of expansion. This year, retailers will absorb nearly 88 million square feet of space to slash nationwide vacancy 60 basis points to 6.0 percent, a level on par with the peak of the last cycle. Average rents will advance 2.5 percent as leases set during the recession come up for renewal and adjust to market rates in a much lower vacancy environment.
  • Professional and business services, and financial services payrolls continue to expand, helping to fill additional office space. More than 1 million positions are unfilled, signaling increased demand for space. As companies grow, they will need larger office layouts, lifting absorption trends. The tight construction pipeline, dominated by build-to-suits and generally only occurring in the healthiest markets, will help support performance trends. This year, the national office vacancy rate will tighten by 80 basis points to 14.5 percent, the lowest year-end level since before the recession.

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.

Surging Economy Likely to Carry into 2015; Positive Prospects for Commercial Real Estate

December 30, 2014

  • The U.S. economy is expanding at the fastest pace since 2003, providing ample evidence that GDP growth will be on solid footing as 2015 begins. Equity markets are hovering near all-time highs, unemployment is below 6 percent and falling, and job gains have been impressive — all reflective of strong economic momentum. Consumers echoed the good feelings as confidence reached an eight-year high in December. In addition, with foreclosures from the housing crisis beginning to fall off credit reports, home values have begun a solid recovery. This convergence of positive trends will cause the Federal Reserve to deeply consider its interest rate strategies. The headwinds still confronting growth include the sizable divergence between the health of the U.S. economy and that of many of its trading partners, and risks spawned by the rapid plunge in oil prices. Nonetheless, GDP growth should exceed 3 percent in 2015 and could surprise to the upside, depending on Fed policies in the coming months.

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  • GDP growth was 5 percent in the third quarter, the highest level achieved in 11 years. An increase in consumer spending drove much of the gain during the period. Consumers contributed 2.2 percentage points of economic expansion as spending focused on healthcare. Businesses also supported the rise in GDP through expenditures on software and structures. The impact of fiscal drag is finally gone, which boosted spending by the government on a year-ago basis for the first time since 2009.
  • Oil prices have fallen 40 percent since the most recent peak last summer, creating a ripple effect throughout the world. In the U.S., commuters are partially redeploying the savings into consumption, which helped drive last quarter’s blistering GDP growth. Elsewhere, Russia is slipping into recession as the toll of low oil and gas prices, soft energy demand from Europe’s stalled economy, and international sanctions is beginning to mount. OPEC is committed to current production levels to keep prices low in an effort to drive smaller producers out of business and devalue America’s fracking industry. Although the implications of lower energy prices have significant geopolitical stakes, the impact on the U.S. economy will be a net positive.

    Impact on Commercial Real Estate

  • A booming economy will pay dividends for the national office market this year, tightening vacancy in most markets. Office operations have lagged the overall recovery in commercial real estate, but vacancies will finally descend below the 15 percent threshold in 2015, lifting rent growth to 4.1 percent.
  • Apartment operations could face hurdles in the next two years due to supply growth and strong economic conditions. Although gridlock on Capitol Hill is anticipated, both parties will likely work to remove hurdles for first-time homebuyers as significant construction comes online. When the housing market begins to siphon demand away from apartments, vacancies will edge 10 basis points higher in 2015 to 4.8 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.

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.

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