Employment Momentum, Accelerating Wages Support Real Estate Performance Outlook

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Research Brief
January 2017
EMPLOYMENT
Important Factors
December employment growth of 156,000 jobs moderated from the pace seen through much of 2016. Yet, given that the economy is approaching full employment, job creation above 100,000 positions per month is more than enough to match labor force growth.
Education and health services together with professional and business services combined for 52
percent of new jobs created during 2016. Both sectors benefit from emerging technology and demographic trends continuing into 2017 and tend to create higher-wage positions. During 2016, these expanding sectors pushed office vacancy down by 40 basis points to 14.4 percent.
Although the 5.6 million current job openings sit near a record, a sub-5 percent unemployment rate
tempered employment growth. Hiring in the coming year could moderate as employers struggle to fill positions in a tight labor market, but the modest easing does not signal economic slowing. Apartment demand highlights this trend as 2016 absorption reached the third-highest yearly total on record at 328,000 units, with prospects for 2017 remaining optimistic.
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Employment Momentum, Accelerating Wages Support Real Estate Performance Outlook
The employment market consistently signaled steady economic growth last year despite numerous unanticipated events that could have upended the expansion. Nationally, 2.2 million jobs were created during 2016, with unemployment dropping to its
lowest level since 2007. The economy has generated 75 straight months of positive growth, the longest on record.
The tightening labor market finally achieved accelerated wage growth as
average hourly earnings jumped 2.9 percent since December last year, the strongest pace of wage growth since the expansion began. Rising wages have been a missing piece in the current expansion and will enable households to increase consumption going into 2017, sustaining economic momentum and bolstering the retail sector.
156,000 Monthly Employment
December 2016
2.9% Wage Growth
Through December 2016
Y-O-Y
* Forecast
Sources: Marcus & Millichap Research Services; BLS
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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.

 

 

Brighter Consumer Outlook Spurs Spending Boost

 

RESEARCH BRIEF

 

 

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Research Brief
December 2016
RETAIL SALES
Developing Trends
Retail property operations are set to strengthen further in 2017 as net absorption outpaces development. Vacancy will fall 40 basis points to 5.2 percent at the end of 2017, the lowest level since 2000.
Growing home sales and apartment absorption pushed home furnishings and furniture sales up 4 percent over the past year. Expanding demand for housing in 2017 will further increase growth for this sector.
Amazon opened a prototype grocery store for testing near its headquarters. Branded Amazon Go, the concept centers around a no-hassle, no-checkout-line experience supported by a smartphone app. Opening to the public in 2017, the national rollout could include up to 2,000 locations.
The 2016 Holiday sales forecast updated with November data shows solid growth in the 3.6 percent range increase over 2015 and also above the 7 year average of 3.4 percent growth.
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Brighter Consumer Outlook Spurs Spending Boost
The post-election bump on Wall Street has supported a rise in confidence from 87.2 in October to 93.7 for November, the third highest monthly gain since the end of the recession. Rising consumer optimism was evident in November’s 3.7 percent year-over-year growth in core retail sales, which was well above the 2.2 percent yearly average from the previous 12-month period. Retail sales growth was supported by exceptional gains in the health and personal care category, where sales vaulted 6.2 percent over the past year. Retailer Ulta Beauty has capitalized on a growing trend of providing services as well as selling products, leading the company to undertake a dramatic expansion. Plans call for doubling the store count to 2,000 locations and hiring 2,500 workers.
3.7% Core Retail Sales

November 2016

Y-O-Y

2.4% Wage Growth

Through 3Q 2016

Y-O-Y

* Through November

Sources: Marcus & Millichap Research Services; U.S. Census Bureau; National Retail Federation

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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Fed Rate Increase Creates Mixed Signals for Investors

Research Brief
December 2016
RATE INCREASE
IMPORTANT FACTORS
The current 4.6 percent unemployment rate is effectively full employment. The tight labor market will support wage growth, raising inflationary pressure and prompting the Fed to remain highly vigilant in the coming year.
Past Federal Reserve monetary policy tightening decisions triggered a decline in the stock market and lower long-term Treasury rates. This increase was widely expected and could be different.
The Federal Reserve rate increase is largely already baked into the 10-Year Treasury rate, which has risen by nearly 80 basis points since early November. Lenders have held spreads through this period, raising borrowing costs and widening the buy/sell expectation gap.
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Fed Rate Increase Creates Mixed Signals for Investors
The Federal Reserve raised its overnight rate by 25 basis points to a range from 0.50 percent to 0.75 percent. This decision reiterates the positive economic outlook for 2017 that could accelerate monetary policy in the coming year. Rising interest rates will remain a significant factor in the commercial real estate market that could force asset repricing. Rising rates widen gap in expectations and slow trans-action velocity as investors reassess prospective yields. While many sellers are still trying to achieve peak pricing, buyers are reevaluating acquisition criteria in a rapidly moving capital environment. The performance outlook remains positive, but modest upward pressure on cap rates is emerging.
2.57% 10- Year Treasury
Dec. 14, 2016
4.6% Unemployment
Rate – Nov. 2016
* Through November ** Through third quarter
Sources: Marcus & Millichap Research Services; BLS; Federal Reserve Board
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.

 

U.S. Labor Market Resoundingly Consistent; November Hiring Maintains Trend of Broad, Steady Growth

December 2, 2016

  • The pace of hiring in November serves up the latest evidence that U.S. payrolls continue to expand at a steady pace and measures of labor market slack are also tightening. With the U.S. economy on track to add 2.2 million jobs during 2016, the path for the Federal Reserve to raise its benchmark short-term lending rate later this month appears to be clear. A more aggressive pace of rate increases could ensue in 2017 as the central bank monitors the effects of the new administration’s policies on economic trends and inflation.

  •  housing-sector-16_9_mm_largeAn expansion of private-sector payrolls and hiring at government agencies underpinned a gain of 178,000 positions last month, a level more than sufficient to absorb new entrants to the labor force and take up slack. The addition of 63,000 professional and business services workers led growth in all sectors and included nearly 24,000 new posts in technical services, a primary office-using field. After subdued growth in the past five years, the greater share of office-using jobs attributable to gains in technical services payrolls in 2016 could accelerate an increase in office space demand next year.

  • An unemployment rate of 4.6 percent and an underemployment level of 9.3 percent mark the lowest levels in each measure during the current cycle. Breaking it down further, the unemployment rate for college-educated workers also hit a multiyear low of 2.3 percent last month. With a record level of job openings and a dwindling supply of college-educated workers available to fill many of the open spots, employers may encounter greater challenges meeting staffing needs in the coming months. Monthly job gains could moderate as a result, but this is not a sign of the economy weakening.

  • Additional growth in technical services payrolls continues to positively affect office property performance this year and appears positioned to make a greater contribution in 2017. In 2016, the U.S. office vacancy rate is on track to fall to 14.4 percent and an additional decline is anticipated next year. A missing element of the current improvement in office property performance is financial services employment, which remains below the pre-recession peak even after adding 145,000 positions so far this year.

  • Payroll additions and rising wages support increased household formation, helping to maintain strong demand trends and low vacancy in the U.S. apartment sector. This year, the national apartment vacancy rate will decline to 3.8 percent. The projected delivery of 371,000 apartments in 2017 will likely mark the peak of the current construction cycle, but vigorous absorption means the national vacancy rate will only rise nominally. Class A complexes will be most vulnerable to new supply, while the Class B and Class C segments will maintain robust demand trends.

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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.