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.

Sustained Pace of Hiring Lowers Key Unemployment Rates; Rising Wages Could Intensify Inflation Pressure

November 4, 2016

  • The labor market maintained a healthy pace of growth in October. In addition, a vigorous rise in wages and upward revisions for the previous two months point to economic growth that will sustain positive forward momentum. Coming after the strong third quarter GDP number of 2.9 percent, October’s employment data reaffirms the underlying strength of the national economy and signals a high probability that the Federal Reserve will lift its benchmark lending rate in December.

  •  housing-sector-16_9_mm_largeU.S. employers added 161,000 positions in October, and hiring totals for the preceding two months were revised upward by 44,000 jobs, which suggests stronger employment trends for the coming months. Year to date, the economy has averaged 181,000 positions per month and remains on track to add about 2.2 million this year. Service industries are leading the labor market so far this year, especially healthcare as well as professional and business services. The current labor market expansion has been the steadiest economic barometer since the end of the recession, and maintaining a monthly pace of 150,000 jobs will absorb new entrants into the labor force as well as whittle away labor market slack.

  • The unemployment rate receded to 4.9 percent last month and other measures of the labor market also improved. The underemployment rate of 9.5 percent marked the lowest level in more than eight years, while the average hourly wage increased 2.8 percent from one year ago, the fastest rate of growth since 2009. U.S. employers are competing more vigorously for workers as labor market slack abates. Additional wage increases could accelerate inflation and economic growth, encouraging the Fed to normalize monetary policy more quickly.

  • Growing wages will potentially drive spending during the upcoming holiday shopping season and support a higher pace of GDP growth during the current quarter. The Atlanta Fed upwardly revised its fourth quarter forecast to 3.1 percent on the heels of the October employment report. Retailers are benefiting from strong consumer spending trends and keeping U.S. retail properties full. Vacancy in the retail property sector is on track to fall 40 basis points this year to 5.6 percent.

  • Household formation during this growth cycle has favored renting rather than homeownership, pointing to a shift in lifestyle and barriers to homeownership. As a result, apartment developers have ramped up construction, and builders will complete 320,000 units this year, the highest annual total since the 1980s. Healthy net absorption will keep vacancy near 4 percent through the remainder of the year.

  • Hiring momentum and rising wages will contribute to the creation of new rental households. Growing demand will push down the U.S. apartment vacancy rate to 3.8 percent this year on net absorption of 354,000 units and support a 4.5 percent gain in the average rent. Completions will hit a cycle high of 320,000 rentals in 2016 and peak at 371,000 units next year. Supply growth will pressure vacancy in a few major metros, although net absorption will remain elevated and minimize the impact on 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 weekly by top industry professionals, showcasing time-sensitive information and valuable analysis. Add the Research Brief blog to your reading list today.

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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.

Tight Housing Inventory Restraining Home Sales, But Builders May Shift Emphasis to Entry-Level Market

October 26, 2016

  • For-sale housing inventory fell to a decade low during August, and limited housing stock along with strong demand for homes are beginning to encourage home builders to shift their focus from larger, luxury homes to smaller, entry-level housing. This change could provide some relief to the supply-constrained housing market, though a larger impact will likely not be realized until the spring. Through the remainder of this year, newly formed households will likely continue to favor rentals, sustaining steady demand for the record number of apartments scheduled for delivery in 2016.

  • New-home builders focused on larger, luxury homes since the recession as buyhousing-sector-16_9_mm_largeers of these homes faced fewer credit restraints and remained active in the market while first-time homebuyer activity weakened. As a result, a shortage of smaller, entry-level homes typically targeted by first-time homebuyers weighed on the market. Builder sentiment, however, has begun to shift as they seek to capitalize on rising demand for single-family housing. Builders are beginning to construct more smaller homes with lower price points and geared toward the entry-level buyer. In the second quarter, the median square footage of a newly constructed single-family home declined by 70 square feet from the median of homes built in the first quarter, while sales of new homes in the $200,000 range strengthened.

  • Approximately 5.9 million jobs remain open, the highest level on record. Translating openings to actual positions remains somewhat challenging, however, indicating difficulties matching candidates’ skillsets with job requirements. With the unemployment rate at 5 percent and the under-employment rate under 10 percent, a thinning pool of prospective workers will exert upward pressure on wages as employers intensify competition for workers. During the past 12 months, average hourly earnings rose 2.6 percent.

  • Despite healthy job creation and low interest rates, sales of existing single-family homes have failed to advance as inventory constraints and high prices keep many would-be buyers from purchasing homes. In recent months, sales activity has flattened but remains above the long-term average, and the supply of existing single-family homes for sale fell to 4.2 months in August, the lowest level since mid-2005. Rising prices have been driven by this shortage of listings and healthy demand, with the median advancing more than 4 percent above the prerecession peak to $240,200 during the month.

  • Household formation during this growth cycle has favored renting rather than homeownership, pointing to a shift in lifestyle and barriers to homeownership. As a result, apartment developers have ramped up construction, and builders will complete 320,000 units this year, the highest annual total since the 1980s. Healthy net absorption will keep vacancy near 4 percent through the remainder of the year.

  • Mortgage applications are up more than 25 percent from one year ago, but applications for home purchases have only increased 10 percent during the span. Low interest rates and rising home values are driving significant refinancing activity, leaving some homeowners with more disposable income for home improvement projects. As a result, sales at home improvement stores have increased 2.2 percent over the last year, fostering healthy retailer expansion. This year, retail vacancy will fall to 5.6 percent, the lowest level this business cycle.

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.

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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.

Hiring Positive but Restrained by Tight Labor Market; Wage Pressure Emerging

October 10, 2016

  • Hiring in September reaffirmed that job creation is moderating from the elevated levels of the past two years. The downshift to a more tempered pace likely reflects a shortage of qualified workers as unemployment hovers near 5.0 percent. Accelerated wage gains offer some evidence that employers are competing vigorously to fill positions, an action that could intensify inflation pressures in the coming year.

  • The addition of 156,000 jobs last month fell somewhat short of expectations, although a broad range of industries expanded payrolls. Healthcare providers contributed 22,000 positions to the total, and have created 3.9 million positions over the past 10 years. The enrollment of new workers in employee-sponsored coverage and an aging population will generate new positions in the near term, generating demand for medical office space. Another sector of note is natural resources and mining, which stabilized following a string of 23 consecutive months of cuts. Employment in the oil and gas industry appears to have balanced as oil prices have staged a modest rally.

  • Approximately 5.9 million jobs remain open, the highest level on record. Translating openings to actual positions remains somewhat challenging, however, indicating difficulties matching candidates’ skillsets with job requirements. With the unemployment rate at 5 percent and the under-employment rate under 10 percent, a thinning pool of prospective workers will exert upward pressure on wages as employers intensify competition for workers. During the past 12 months, average hourly earnings rose 2.6 percent.

  • Job growth and the tight labor market are spurring household formation and maintaining U.S. apartment vacancy at seldom-seen levels. In the third quarter this year, vacancy retreated 30 basis points to 3.5 percent despite a substantial wave of new rental stock. Approximately 100,000 rentals remain under construction with delivery dates in the fourth quarter, which will likely bump vacancy 30 basis points higher by the end of the year.

  • Additional hiring and wage growth will support increased spending on retail goods in the coming months, particularly as the holiday season approaches. Core retail sales, or receipts excluding automobiles and gasoline, have been growing at a pace in alignment with the long-term average of 4 percent annually. Online sales are capturing an increased share of general merchandise sales, but many retail centers are realigning their tenant profiles to favor restaurants and services. The combination of restrained construction and growing demand has pressured national retail vacancy to the lowest level since 2006, with additional tightening expected to lower the vacancy rate to 5.6 percent by 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.

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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.