Fed Makes Long-Awaited Move; End of an Era, Signal of Confidence

December 17, 2015

  • The U.S. economy passed a major psychological threshold as the Federal Reserve closed the door on the extraordinary measures put in place to combat the financial crisis. With the quarter-point increase of its overnight lending rate, the Fed signaled that the economy has finally returned to normal operating levels. Though some sectors still face headwinds, broader economic measures including employment, retail sales and even home prices have largely returned to healthy performance standards. The Fed’s policy-setting committee reiterated that it will maintain a gradual pace of rate increases, aligning actions with key indicators such as labor market conditions, inflation and international developments.
  • While short-term lending will be influenced by the Fed’s move, long-term interest rates will face little upward pressure in the immediate future. As 2016 progresses, the cost of long-term debt could see upward pressure, but this will be influenced as much by domestic and international confidence as by the central bank’s actions.
  • The move by the Federal Reserve will likely benefit commercial real estate investors, more because of the message it conveys than the influence of the rate change itself. By raising the rate for the first time since 2006, the Fed
    has finally expressed its confidence in economic growth, potentially opening the door to increased consumption and business investment. These positive trends would benefit all commercial real estate sectors as household formations escalate and increased discretionary income supports demand for housing, retail goods and business services.
  • The tempo and sustainability of economic growth that swayed the central bank represent a decidedly positive development for the office sector, and industrial properties will also benefit from this trend. Additional hiring will generate new office space demand and put downward pressure on vacancy. Also, incremental demand may also emerge in interest-rate-sensitive financial services businesses, contributing to a projected decrease in the U.S. vacancy rate next year. In the industrial sector, a more robust pace of economic growth stemming from higher consumption will stimulate additional space demand from retailers. However, the rate increase will likely also strengthen the dollar, restraining U.S. companies with significant export business.
  • A solid pace of household creation accompanies an economic expansion and will generate new demand for apartments in the near term. U.S. apartment vacancy will fall this year to 4.2 percent and will rise nominally in 2016 as elevated completions narrowly outpace net absorption. Also, the Fed’s benchmark rate most directly affects consumer borrowing for items that include residential mortgages. Any additional tightening in monetary policy that suppresses single-family homebuying and maintains a low rate of homeownership will provide a supplemental lift for the multifamily sector.

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 Pace Back on Track; Indicators Point to Fed Rate Hike in December

December 7, 2015

  • U.S. employers hired new workers at a healthy clip last month, keeping the economy on target to add 2.5 million jobs in 2015. The payroll gains in November, and upward changes to the totals of the preceding two months, likely remove the final obstacle to the Federal Reserve making its long-awaited increase in its overnight lending rate later this month. Future moves in the central bank’s tightening campaign will remain dependent on further improvements in the U.S. economy and progress toward reaching the Fed’s targeted level of inflation.
  • Employers added 211,000 jobs in November, mirroring the average monthly increases recorded year to date. Gains were spread across a number of industries, including those closely associated with consumer activity. Growth in the trade sector featured the addition of nearly 31,000 positions at retail outlets. Initial estimates of Black Friday activity, however, revealed a high volume of sales conducted online, leaving unclear how many more posts will be required at
    brick-and-mortar stores during the holidays. Hotel and restaurant openings, plus increased staffing needs for holiday events and travel, supported a gain of 39,000 leisure and hospitality jobs in November. Healthcare providers also continued to expand staffing but, outside of consumer-driven sectors, manufacturing employment slipped, and natural resources and mining cut 11,000 posts.
  • Accompanying the expansion of payrolls, other gauges of labor-market conditions offered positive signals. Most conspicuously, the unemployment rate held at 5 percent, while the underemployment rate ticked up slightly to 9.9 percent. Still, the reading of less than 10 percent in this widely watched measure of labor-market slack marks the second-lowest reading over the past seven years. Wage growth, meanwhile, remained on a positive trajectory, with an uptick in November resulting in a 2.3 percent gain during the past 12 months.
  • The addition of workers at shopping centers and stores occurs in conjunction with a period of improving property performance in the retail sector. Growing space demand continues to outpace subdued completions, leaving the U.S. vacancy rate at 6.3 percent in the third quarter, the lowest level in nearly 10 years. More store openings will lower the rate to 6.1 percent this year and raise rents, though new space may be needed to relieve pent-up demand from retailers seeking to grow locations in 2016.
  • Conditions in the U.S. industrial property sector are also strengthening as retailers looking to provide same-day delivery to customers continue to emerge as a new source of demand for space in major metros. This year, the U.S. vacancy rate is on track to slide 60 basis points to 6.1 percent, which will support an increase in the average rent of more than 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.

Employers Accelerated Hiring in October; Key Measures of Labor-Market Slack Tighten

November 9, 2015

  • U.S. employers shook off their third-quarter doldrums in October, hiring the most new workers in any month so far this year. The sizable gain in payrolls also renews discussions about a possible hike by the Federal Reserve in the overnight lending rate before the end of this year. The drop in the unemployment and underemployment rates in October to multi-year lows may convince the central bank that the labor market slack has tightened sufficiently to spur higher wage growth and warrant a move.
  • Fueled almost entirely by growth in private-sector industries, employers created 271,000 positions in October, nearly matching the sum of jobs added in the preceding two months combined. Payroll gains spanned several sectors, and the approaching holiday season figured prominently in last month’s hiring spurt. Retailers added nearly 44,000 workers in October, the most in any month this year. Both Target and Amazon recently announced plans to bring on a significant number of seasonal workers, which should be reflected in additional increases in retail staffing in the weeks ahead. Outside of holiday-related activity, the ongoing enrollment of new workers in employer-sponsored health plans contributed to a gain of approximately 57,000 healthcare jobs last month.
  • Both the unemployment rate and the underemployment rate dipped to eight-year lows last month, reaching 5.0 percent and 9.8 percent, respectively. The declines will likely figure in the Fed’s upcoming monetary policy discussions. The much-scrutinized labor force participation rate, meanwhile, held at 62.4 percent but has decreased this year. The fall in the rate, however, predates the recession and actually commenced at the turn of the century. While the economic downturn accounted for a portion of the decrease, factors including the aging of the population and greater college enrollment also contributed significantly.
  • The U.S. office sector appears poised to break out in the months ahead. Professional and business services employers created 78,000 positions in October and have added workers in nearly every month over the past two years. Gains in office-based businesses including accounting, engineering, architecture and administrative services drove most of the increase and continue to fill unused cubicles and workspaces. This year, U.S. office vacancy will tumble 40 basis points to 14.9 percent on net absorption of 84 million square feet. Minimal construction and growing demand for larger layouts will support an additional decline in the vacancy rate next year.
  • October hiring provides additional momentum to the U.S. apartment sector. Through the first three quarters this year, the U.S. vacancy rate slid 60 basis points to 3.9 percent, the lowest quarterly reading in 14 years, as more than a quarter million units were absorbed. Construction volumes remain elevated, but the steady growth in demand will maintain the vacancy rate in the low-4 percent range in the coming quarters and support additional concessions burn and higher rents.

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 Momentum Slackens; Fed Likely to Postpone Rate Increase

October 5, 2015

  • The U.S. economy continued to make headway in September, though the pace of employment growth slackened. Employers have added 1.8 million workers so far this year, a steady performance in the face of international turbulence and economic weakening that began to emerge in August. These negative headlines, together with sliding exports induced by the stronger dollar, caused some employers to slow hiring. A silver lining of the slower labor market will be increased caution by the Federal Reserve as it contemplates a rate hike. The central bank will digest the payroll numbers at its October meeting, while also considering other employment metrics, inflation, and global and domestic economic trends before reaching a decision on how to manage the Federal Funds rate.

  • U.S. job creation fell shy of expectations in September, adding 142,000 workers as both the energy and manufacturing sectors shed jobs. Generally, results remained positive, led by 31,000 new professional and business services positions, and 31,000 new hires at bars, restaurants and hotels. The hotel industry is recording its most significant construction since the recession, and additional hiring will occur in the near term as properties come online this year and in 2016.
  • Full-time employment has recovered to its pre-recession levels while part-time employment has also expanded. Individuals purposely selecting part-time work for lifestyle reasons remain the principal driver of growth in part-time employment. Part-time employment has risen steadily as the U.S. shifted from a manufacturing-based economy to a higher dependence on service businesses over the past 50 years. The greater availability of jobs working limited hours in fields that include call centers, hospitality and retail has lifted the percentage of employment in part-time positions to more than 18 percent as of September, near an all-time high.
  • Rising consumption and the growth of e-commerce has spurred retailer demand for warehouse and distribution space nationwide, fueling an increase in requirements for truck drivers and workers to stock shelves and fill orders. Year to date, more than 59,000 positions were added in transportation and warehousing, including a nominal gain in September. In the first half of this year, national industrial vacancy dipped to 6.9 percent. A combination of restrained completions and growing demand will slice the rate to 6.5 percent this year and support a 5.3 percent climb in the average rent.
  • Retailers added nearly 24,000 workers last month, reflecting early hiring for the holiday season and additional store openings. This year, the national vacancy rate will fall 30 basis points to 6.1 percent behind net absorption of nearly 75 million square feet. Retail property construction remains well below the annual levels posted before the recession, partly as a consequence of lagging new home construction, and will support additional declines in vacancy.

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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