Strong Fourth Quarter Job Creation Bolsters 2020 Real Estate Outlook

 

 

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EMPLOYMENT DECEMBER 2019
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Research Brief
Strong Fourth Quarter Job Creation Bolsters 2020 Real Estate Outlook
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Job creation soars in November. The U.S. economy added 266,000 positions in November, the largest monthly gain since January. The surge in hiring was lifted by the resolution of the General Motors-United Auto Workers Union strike, returning 41,000 auto workers to payrolls. However, even omitting these positions, an above-average 225,000 personnel were still added. The month’s robust hiring lowered the unemployment rate 10 basis points to 3.5 percent, matching the historical low.

Healthcare hiring driving demand for medical properties. Employers have added approximately 2 million jobs this year, and while employment growth has eased compared with last year, hiring has been particularly robust in the health services sector. The need for healthcare professionals is driven by demographics. About 5 million people will turn 75 over the next five years, exacerbating the need for medical services and increasing demand for hospitals, urgent care centers, senior housing facilities, and medical office space. Markets popular with retirees or with well-established biomedical research hubs will likely see added tenant demand for buildings that support these services.

Employment growth favoring smaller markets. The pace of job creation will ease going forward as the labor market nears full capacity. Because there are more open positions than people available for hire, employers are implementing new recruiting strategies, including adding jobs in secondary and tertiary markets to tap underutilized labor pools. This trend has helped tighten office and apartment vacancies in these metros. With construction in smaller cities still limited, supply and demand trends will deliver elevated rent gains. Investors targeting secondary and tertiary markets will benefit from space demand created by this staffing shift.

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Developing Trends
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Market remains near full employment, but some hiring options remain. Both the labor force participation rate and the employment/population ratio have changed little over the past year. Yet, the number of people marginally attached to the labor force has declined about 25 percent over the past year. These individuals, who wanted work but ceased looking, are now finding opportunities as tight labor conditions prompt employers to consider candidates with long job absences.

Low unemployment brightens real estate outlook.
The 21-month stretch with unemployment at or under 4 percent has contributed to accelerated household formation and greater wage growth. The added housing demand has helped reduce the national average apartment vacancy rate to 3.7 percent as of September, a nearly 20-year low. More households and higher incomes have also boosted retail spending by 4.4 percent this year, underscoring the need for shopping centers.
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180,000

Avg. Number of Jobs Added Per Month in 2019
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1.5%

Y-O-Y Rate of Employment Growth
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* Through November
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics

 

Fed Issues Third Rate Cut, Sustains Prospect of Continued Growth

 

 

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FINANCIAL MARKETS OCTOBER 2019
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Research Brief
Fed Issues Third Rate Cut, Sustains Prospect of Continued Growth
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Fed remains accommodative. In an effort to lengthen the economic runway, the Federal Reserve on Oct. 30 cut the overnight rate by 25 basis points for the third time in 100 days. Domestic growth has been moderating this year, falling to 1.9 percent in the third quarter as the trade war with China curtailed exports and ebbed inventory investment. With tariffs on Chinese goods increasingly coming into play, the economy could face additional pressure, but the Fed has signaled that another rate cut in December will be dependent on incoming data. Several Fed members have argued against additional cuts, as both inflation and unemployment remain very low. A decision on rate policy will largely be determined by the holiday retail season and ongoing trade talks. Should a resolution to the trade war be achieved, the economy and interest rates will likely witness an upward bounce. The Fed’s commitment to short-term Treasury purchases remains another key factor, increasing liquidity in the overnight markets and reducing short-term interest rates. This has helped “uninvert” the yield curve as the three-month Treasury rate fell below the 10-year reading. Though this has reduced recession risk, many speculate that a recession could still be on the horizon.

Investor activity sluggish despite widened yield spreads. With the 10-year Treasury hovering between 1.5 to 1.8 percent in recent months, investors have been favored by strong levered yields. The average combined commercial real estate cap rate remains in the low-6 percent range, delivering a 400- to 450-basis-point premium above the 10-year Treasury, among the widest spreads witnessed in the past decade. While this has bolstered levered return prospects, many buyers remain wary of a potential economic slowdown and their underwriting models continue to deliver more cautious valuations. Sellers, meanwhile, continue to cite strong performance metrics that support aggressive asking prices. The resulting bid/ask spread has moderately slowed transaction activity for all commercial real estate property types excluding industrial assets. Though third quarter commercial real estate sales slowed relative to the same period last year, they are still quite strong compared with the long-term average.

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Developing Trends
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Job creation moderates yet retains stability. The national unemployment rate contracted to a record low in September at 3.5 percent. This has contributed to softened employment growth this year, adding an average of 161,000 jobs per month, relative to a monthly average of 223,000 jobs in 2018.

Retailers hopeful as consumption accelerates. In September, core retail sales rose by 4.5 percent year over year for the second consecutive month. Consumer spending remains elevated, demonstrating a strong recovery from the sluggish growth pace of 2.5 percent in February. This points to a positive growth outlook for the holiday season.

Fed using data-driven strategy. Inflation will play a pivotal role for future rate policy as Chairman Powell noted the Fed’s preferred inflationary measure — core PCE — remained below the Fed’s 2 percent target in recent months.

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6.3%
Average CRE Cap Rate
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1.77%

10-Year Treasury Rate
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* Through Oct. 30
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; Federal Reserve Bank

 

Fed Delivers Third Rate Cut, Sustains Prospect of Continued Growth

 

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FINANCIAL MARKETS OCTOBER 2019
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Research Brief
Fed Delivers Third Rate Cut,
Sustains Prospect of Continued Growth
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Fed remains accommodative. In an effort to lengthen the economic runway, the Federal Reserve on Oct. 30 cut the overnight rate by 25 basis points for the third time in 100 days. Domestic growth has been moderating this year, falling to 1.9 percent in the third quarter as the trade war with China curtailed exports and ebbed inventory investment. With tariffs on Chinese goods increasingly coming into play, the economy could face additional pressure, but the Fed has signaled that another rate cut in December will be dependent on incoming data. Several Fed members have argued against additional cuts, as both inflation and unemployment remain very low. A decision on rate policy will largely be determined by the holiday retail season and ongoing trade talks. Should a resolution to the trade war be achieved, the economy and interest rates will likely witness an upward bounce. The Fed’s commitment to short-term Treasury purchases remains another key factor, increasing liquidity in the overnight markets and reducing short-term interest rates. This has helped “uninvert” the yield curve as the three-month Treasury rate fell below the 10-year reading. Though this has reduced recession risk, many speculate that a recession could still be on the horizon.

Investor activity sluggish despite widened yield spreads. With the 10-year Treasury hovering between 1.5 to 1.8 percent in recent months, investors have been favored by strong levered yields. The average combined commercial real estate cap rate remains in the low-6 percent range, delivering a 400- to 450-basis-point premium above the 10-year Treasury, among the widest spreads witnessed in the past decade. While this has bolstered levered return prospects, many buyers remain wary of a potential economic slowdown and their underwriting models continue to deliver more cautious valuations. Sellers, meanwhile, continue to cite strong performance metrics that support aggressive asking prices. The resulting bid/ask spread has moderately slowed transaction activity for all commercial real estate property types excluding industrial assets. Though third quarter commercial real estate sales slowed relative to the same period last year, they are still quite strong compared with the long-term average.

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Developing Trends
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Job creation moderates yet retains stability. The national unemployment rate contracted to a record low in September at 3.5 percent. This has contributed to softened employment growth this year, adding an average of 161,000 jobs per month, relative to a monthly average of 223,000 jobs in 2018.

Retailers hopeful as consumption accelerates. In September, core retail sales rose by 4.5 percent year over year for the second consecutive month. Consumer spending remains elevated, demonstrating a strong recovery from the sluggish growth pace of 2.5 percent in February. This points to a positive growth outlook for the holiday season.

Fed using data-driven strategy. Inflation will play a pivotal role for future rate policy as Chairman Powell suggested the Fed’s preferred inflationary measure — core PCE — will have to significantly rise before another rate reduction is issued. Core PCE has remained in the upper-1 percent range in recent months.

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6.3%
Average CRE Cap Rate
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1.77%

10-Year Treasury Rate
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* Through Oct. 30
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; Federal Reserve Bank

 

Retail Spending Strong, Growth Emerging From Diverse Sectors

 

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RETAIL SALES OCTOBER 2019
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Research Brief
Retail Spending Strong, Growth Emerging From Diverse Sectors
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Consumer spending active in midst of uncertainty. For the second consecutive month, core retail sales generated 4.5 percent annual growth as the softening economic outlook had little effect on shopping habits. While spending has moderated relative to last year, consumption trends are gaining traction, setting the stage for a potentially strong holiday season.

New trends surface as retail sales build momentum. After dipping to just 2.5 percent growth in the first quarter, consumption has been revived. Bars, restaurants and pharmacies remain notable catalysts for increased spending, but new trends have begun to emerge. Grocery stores sales are witnessing a modest rejuvenation, with sales delivering consistent annualized growth in the upper-4 percent range in recent months. Expansions by Aldi, Lidl and Sprouts Farmers Market, along with significant reinvestment into current stores by a number of other chains, appear to have boosted grocery store performance. Spending at sporting goods retailers is also trending up, notching two straight months of substantial gains following 36 consecutive months of relative inactivity. Improved omnichannel capabilities of Dick’s Sporting Goods and REI are supporting this resurgence.

Apparel industry in transformation again.
The retail sector remains in transit to reinvention, with the clothing industry facing additional headwinds. Apparel stores continue to feel the brunt of retail’s revolution as companies including Charlotte Russe, Forever 21 and Gymboree recently filed for bankruptcy. While certain segments of the fashion sector remain strong, the often fickle consumer preferences have once again turned against recent favorites. Closed locations have provided investors with new opportunities, allowing them to retenant their properties with more sustainable retailers. Underwriters are beginning to put a much heavier emphasis on tenant mixes, in addition to preferring loan-to-value (LTV) ratios in the 60 to 70 percent range.

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Developing Trends
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Retailers benefiting from record-low joblessness. The national unemployment rate dropped to its lowest level in 50 years at 3.5 percent in September. Sustained job creation and rising wages have boosted disposable income to record levels, empowering increased consumption across all types of retail.

Bankruptcies offering investors new opportunities. Forever 21’s recent Chapter 11 bankruptcy filing includes the planned closings of nearly 180 stores, located in regional malls and retail centers. Revitalizing these locations will be crucial for owners as they retenant the space or leverage adaptive reuse strategies to reposition the assets.

Yield spreads revert to more stabilized state. The 10-year and three-month Treasurys recently uninverted after effectively remaining upended for five months dating back to late May. An inversion of these yields is often recognized as an indicator of an impending recession.

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4.5%
Core Retail Sales Growth Y-O-Y
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4.7%

Grocery Store Sales Growth Y-O-Y
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* Through September
Sources: Marcus & Millichap Research Services; The Conference Board; CoStar Group, Inc.; U.S. Census Bureau