Job Openings Outnumber Unemployed, Delivering Opportunities

 

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EMPLOYMENT SEPTEMBER 2019
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Research Brief
Job Openings Outnumber Unemployed, Delivering Opportunities
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Unemployment stays flat as hiring activity trends down. Employers created 130,000 jobs in August, the lowest monthly total since May. Year to date, approximately 1.3 million people have been added to payrolls, compared with 1.9 million during the same time period in 2018. While employment growth slowed, the total number of unemployed remained about the same month to month, maintaining a jobless rate of 3.7 percent.

Labor shortage changing economic landscape for many. The ongoing surplus of job openings compared with available workers has prompted many companies to expand their hiring criteria. Individuals who have traditionally found it difficult to find employment, including those with less education, are now obtaining jobs. Unemployment among high-school graduates with no college experience dropped to its lowest level so far this cycle in May at 3.5 percent and remains at 3.6 percent in August. Joblessness has declined by the widest margin for people without a high-school diploma, down 360 basis points from its long-term average to a near all-time low of 5.4 percent last month.

New hiring patterns unlocking apartment, retail demand. Historically low unemployment is having a notable impact on commercial real estate. A steady income has enabled many individuals to change their living situations, increasing housing demand, especially for less costly rentals. Class C apartments are outperforming the rest of the multifamily sector as vacancy fell to 3.5 percent in the second quarter, its lowest level this millennium, pushing the average effective rent up 5 percent year over year. First-time financial security for many people is boosting consumption on a national level. Core retail sales improved 4.2 percent annually in August, which was the highest rate since October of 2018 and surpassed the trailing 20-year average of 3.9 percent. Greater discretionary spending is in turn maintaining demand for retail space, keeping the national vacancy rate under 5 percent for the seventh consecutive quarter in June, a threshold not broken since 2000.

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Developing Trends
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Education, healthcare hiring defies national trend. August’s employment figures, although inflated by the hiring of 25,000 temporary 2020 Census workers, continues 2019’s downward trend in job growth. This is true for every professional sector except education and health services. Year to date, these industries have added 415,000 new personnel to staffs, about 41,000 more than during the first eight months of 2018.

A note on the BLS Preliminary Benchmark. The Bureau of Labor Statistics (BLS) recently predicted it may reduce the 2018 employment total by 0.3 percent, or 501,000 people. That statement was interpreted by some outlets as implying that 501,000 fewer people were hired in the preceding 12 months. However, this benchmark could change a broader range of historical data and not drastically affect recent job creation. While it may prove to be true that 501,000 fewer people were working than previously thought, the economy remains at full employment.

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7
Consecutive Months Below 4.0% Unemployment
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158,000

Average Jobs Added per Month in 2019
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* Through August, all other values are year end.
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics

 

Yield-Curve Inversion Reiterates Stability Of Commercial Real Estate

 

 

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FINANCIAL MARKETS AUGUST 2019
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Research Brief
Yield-Curve Inversion Reiterates Stability Of Commercial Real Estate
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Brief yield-curve inversion sparks volatility. The short-lived inversion of the 10-year and two-year Treasury yield curve sparked significant financial market volatility as the closely monitored sign of an impending recession delivered a warning alert. Despite efforts by the Federal Reserve and generally strong economic metrics, including steady job creation, low inflation, above-average retail sales growth and elevated small-business confidence, financial markets remain concerned about ongoing trade disputes with China. The flight to safety sparked by the uncertainty has pushed the 10-year Treasury rate to the 1.5 percent range, within 20 basis points of the record low set in July 2016. The convergence of these factors has delivered a unique window of opportunity for commercial real estate investors.

Financial market volatility reemphasizes security of real estate. The recent financial market swings reiterate both the stability of commercial real estate and the attractive yields offered by the sector. In addition, the exceptionally low interest rates currently available provide a strong levered yield premium, with the average combined commercial real estate cap rate of 6.3 percent exceeding the 10-year Treasury by 480 basis points, one of the widest margins this cycle. While this has the potential to attract additional capital to the sector, it also offers current investors an opportune time to reevaluate their existing portfolios. With risks of an impending recession elevated, real estate owners may consider more defensive asset allocations favoring single-tenant net-leased assets with a strong credit backing as well as sectors that generally fare well during weaker economic periods such as healthcare-related real estate. Diversification across markets with different economic drivers and across property types will also become increasingly important as the next economic cycle plays out. The window of opportunity could close quickly, however, as a resolution to the trade war could rapidly erase much of the uncertainty and spark a brisk rise in interest rates.

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Developing Trends
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Job creation maintains steady pace. The U.S. is on pace to hire 2 million new employees in 2019, sustaining unemployment in the upper-3 percent range as job openings still outnumber people seeking work by 20 percent. Sustained job creation remains a primary driver of domestic growth and real estate demand.

Spending picks back up as consumers stay optimistic. Core retail sales growth rose 4.2 percent year over year in July, after posting 3.8 percent gains three of the past four months. Elevated consumer confidence and solid wage growth continue to support spending, putting consumption above historical averages.

Stable economy keeps income levels on the rise. Disposable income remains at an all-time high on an inflation-adjusted basis, reaching $45,600 per capita in June. Year-over-year growth has remained in the mid- to high-2 percent range throughout 2019, reiterating the underlying strength of the economy.

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6.3%

Average CRE Cap Rate
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1.54%

10-Year Treasury Rate
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* Through Aug 16
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; Federal Reserve Bank

 

Traditional Retailers Gaining Ground as Sector Evolution Continues

 


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RETAIL SALES JULY 2019
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Research Brief
Traditional Retailers Gaining Ground as Sector Evolution Continues
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Consumption rise supported by diverse drivers. Retail spending picked up in June, climbing 3.8 percent on an annual basis for the third time in the past four months. Stable consumption is supported by a strong economic foundation, highlighted by continued job creation and healthy inflation. The Fed will likely cut interest rates at the end of July, providing a boost to the economy.

Retail sector transformation balances e-commerce growth. Spending was headlined by familiar faces over the past year, with single-tenant staples in restaurants and pharmacies each witnessing approximately 4 percent growth. E-commerce again led all retail categories; however, growth in this segment has trended downward for the past year and a half. May marked the first month this cycle that e-commerce sales failed to reach double-digit growth. Though online shopping remains a key component of retail spending, its prominence has begun to moderate as experiential brick-and-mortar concepts gain more traction with consumers. The industrial sector continues to benefit from both types of retail, driving demand for distribution centers and warehouses. In 2019, roughly 20 percent of the nation’s industrial leases will be taken by retailers as they look to strengthen last-mile delivery strategies in dense urban areas as well as increase suburban footprints in response to demographic shifts.

Consumers showing more caution as obstacles arise. Spending on electronics and appliances is slowing on an annual basis, logging negative or no change for the past nine months as the economy sits in a more stabilized state relative to last year. Though increased consumption is still evident across many retail segments, discretionary spending on big-tickets items is moderating. Consumers are being slightly more cost-conscious as the cycle extends and geopolitical challenges persist.

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Developing Trends
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Employment growth picks back up. Job creation reached 224,000 in June, rebounding from May’s muted growth. Employment gains have been rather sporadic, producing a monthly average of 172,000 in 2019. Education and health services led all sectors during that time, adding roughly 320,000 positions; however, a labor shortage for medical workers still exists.

Retailers accommodative to evolving shopping patterns. Industrial space demand for retailers has substantially accelerated over the past several years. In 2008, retail trade accounted for just 14 percent of the nation’s industrial leases, while now approximately 20 percent of leases are occupied by retail companies.

Recent tariffs circulating through economy. The latest round of tariffs levied in May could impact consumers within the next couple months as companies’ additional materials costs leak through supply chains. This may alter consumer spending patterns as common goods could receive a price bump, potentially leading to higher levels of inflation.

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3.8%
Core Retail Sales Growth Y-O-Y
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9.5%

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

 

Interest Rates Trend Lower As Fed Responds to Trade War Uncertainty

 



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FINANCIAL MARKETS JULY 2019
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Research Brief
Interest Rates Trend Lower As Fed Responds to Trade War Uncertainty
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Fed has increasingly accommodative stance as trade battles weigh on economy. At its latest meeting, the Federal Reserve showed a greater willingness to ease policy rates in the near term. Chairman Powell pointed to weaker inflation and economic data, together with uncertainty amid trade tensions between the United States and China. The Fed reinforced its willingness to let inflation rise above the 2 percent level going forward, a notable shift in its historical policy framework designed to increase future flexibility. Wall Street has begun to price in rate cuts as early as the July meeting, reflecting a rapid shift toward more dovish policy. Rate cuts during an ongoing expansion would echo similar steps taken during the mid-1990s, when Fed officials responded to softening data by trimming rates three times. The recent trade detente reached between Presidents Trump and Xi at the G20 meetings in Tokyo has eased market concerns in the near term, yet ongoing uncertainty and the potential for re-escalation of tensions remain key considerations of Fed officials moving forward.

Yield spread widening as global interest rates plummet. As the 10-Year Treasury yield hovers in the 2 percent range, borrowing costs have followed suit. This has widened the yield spread between cap rates and lending rates for investments, allowing buyers more aggressive underwriting. Primary markets are likely to be the key beneficiary of this trend due to the razor-thin yield spreads in many property types, particularly highly desired multifamily assets. Lower interest rates could potentially boost market liquidity, as many economic metrics including low unemployment and stable wage growth still favor additional acquisitions. However, risks to the economic outlook remain, particularly in manufacturing industries where tariffs have already caused notable weakness. The impact of previously announced tariffs on consumer goods in the coming months should be closely monitored for risks of slowing consumption and economic growth.

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Developing Trends
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Subdued inflation aiding relaxed Fed stance. While job growth and wage trends are positive, inflationary pressures remain muted. Core CPI recently printed 2 percent, yet the Fed’s preferred metric, Core PCE, trended down to 1.6 percent. Both metrics allow the Fed ample latitude to execute policy as necessary without significant concern of sparking a bout of increased inflationary pressure.

International central banks place downward pressure on interest rates. Within the last month, both the Federal Reserve and the European Central Bank reiterated their willingness to act amid risks of a broader economic slowdown. This has placed significant downward pressure on interest rates, pushing more than $12.5 trillion in sovereign bonds into negative yields. Extremely low and negative rates reinforce the competitive benefits of commercial real estate, where cap rates range from the 4 to 8 percent range.

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2.25%
Current Fed Funds Overnight Rate
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1.6%

Core PCE in May 2019
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* Through June
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; Federal Reserve Bank