Employers Maintained Hiring Trend in April; Underemployment Rate Tightening

July 11, 2016

  • The substantial jump in hiring during June to the highest monthly level this year suppresses talk of a sharp slowdown in job creation and strongly reaffirms that the U.S. economy remains on a growth track. Although last month’s survey occurred before the unexpected outcome of the Brexit vote, secondary employment indicators including initial unemployment claims and elevated job openings point to a stable labor market and prospects for further growth. Employers’ ability to add staff to pursue expansion opportunities, however, could be complicated by tightness in the labor pool that may taper the pace of job creation from the heightened levels of the past two years.
  • Strong hiring in the service sector and a modest contribution from manufacturers generated a gain of 287,000 jobs in June, the highest monthly total since last October. The return of Verizon employees to work accounted for most of the gain of 44,000 information positions, while expanding consumer and personal services sectors also posted solid increases. Healthcare practices grew and retailers created nearly 30,000 posts as out-of-school students took summer jobs. Leisure and hospitality payrolls swelled by 59,000 positions, principally at hotels, bars and restaurants. Some of the hiring may be attributed to preparations for the major political party conventions scheduled later this month in Cleveland and Philadelphia.
  • Employers added an average 172,000 positions monthly in the first half of 2016, and the aggregate gain during the period marked a moderation from levels recorded in the first six months of the preceding two years. Nonetheless, employers remain on pace to create 2.1 million positions this year, which will further reduce excess capacity in the labor market. Last month’s unemployment rate of 4.9 percent nearly matches the Federal Reserve’s targeted level of 4.8 percent, while the more encompassing underemployment rate tumbled to 9.6 percent, the lowest recorded in more than eight years.
  • Office-using staffing continues to grow and push the limits of existing workplaces. Financial services payrolls are expanding, reflecting additional hiring in real estate fields, and professional and business services establishments created 38,000 positions in June. Included in the total are more than 15,000 temporary positions to fill short-term needs of establishments with fiscal years ending June 30. The growth in permanent office-using employment, however, will generate net absorption of 86.5 million square feet this year and reduce the national office vacancy rate to 14.8 percent.
  • Retailers added 192,000 positions in the first half of the year as many national chains continue to build an online presence to complement physical stores. This year, retailers will absorb 67 million square feet of space to lower the national vacancy rate and support growth in the average rent of 2.8 percent. Additionally, growing needs for warehouse space to service online operations will contribute to a 40-basis-point dip in the national industrial vacancy rate to 5.9 percent.

Baby Boomers, Millennials Shaping Retail Landscape, Driving Spending Patterns and New Distribution Channels

June 29, 2016

  • Positive demographic trends continue to generate demand for an array of goods sold through physical and online retail destinations, supporting an increase in retail sales over the past year. While baby boomers and millennials spend money in different ways, the combined two groups account for more than 150 million Americans and spending power in excess of $5.5 trillion, accounting for nearly 30 percent of yearly GDP. The vast scale of these segments of the population has prompted changes across the economic landscape as retailers seek to combine traditional methods and new technologies to capture more customers and sales.Retail-Spending-Rising
  • The emergence of the millennial generation continues to generate demand for products typically associated with household formation. Spending on the furniture and home furnishings segment advanced 3.6 percent over the last 12 months as millennials start new households or unbundle from existing ones. In addition, homeowners continue to frequently visit home improvement stores as rising property values prompt remodeling, fueling a gain in spending at building material and garden center stores 3.6 percent over the past year.
  • The aging of the baby boomer generation, combined with regulations extending insurance coverage and benefits to more consumers of all age groups, has greatly benefited the healthcare industry. In this segment, drug stores have emerged as clear winners. Sales at these retailers soared 8.3 percent over the past 12 months, driven partly by purchases of medications and healthcare related products. Approximately 57 million Americans will be over the age of 65 by 2020, making up 16 percent of the total U.S. population, supporting a positive long-term outlook for the drug store sector.
  • As the millennial generation continues to grow up, they are fostering substantial growth in demand for apartments. While wealthy, affluent millennials favor urban environments with live-work-play options in lifestyle communities and mixed-use developments, the bulk of this group continues to lease suburban properties where rents are more affordable. This dynamic led to the completion of more than 215,000 rentals over the year ending in the first quarter. During the same period, tenants absorbed in excess of 237,000 units, compressing the nationwide vacancy 30 basis points to 4.2 percent. Tighter operations have also supported robust gains in the average rent as reflected in an increase of nearly 6 percent since the first quarter last year.
  • Rather than spending money on things, millennials are allocating income to experiences, leading the age cohort to drive a 6.5 percent gain in sales at bars and restaurants during the past 12 months. The combined spending power of the generation continues to positively affect the entire hospitality industry. First-quarter occupancy at U.S. hotels hit 60.7 percent, the second highest level on record, and supported gains in revenue metrics. Hotel brands continue to respond to the aging baby boomers and the emerging millennial class by changing design standards and features to suit changing guest preferences.

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.

Special Research Brief: Brexit Surprise Has Silver Lining

June 24, 2016

  • Contrary to polls and predictions, citizens of the United Kingdom voted to leave the European Union, creating uncertainty that induced a sharp decline in global equity markets. The British currency fell dramatically, boosting the value of the U.S. dollar, and the quick re-deployment of capital to safer assets pushed U.S. Treasury rates to their lowest levels since 2012. Despite the short-term volatility resulting from this unanticipated outcome of the British vote, the risk to the U.S. economy should be limited.
  • The U.K. receives only 3.9 percent of U.S. exports, so even a modest British recession resulting from the departure would minimally impact the U.S. economy. Granted, the broader EU takes in about 15 percent of U.S. exports, but the U.K. exit is unlikely to spark a substantive economic decline across the remaining 27 members of the union. Another potential hazard stems from the concentration of banking services in London with deep ties across the globe. However, central banks worldwide stepped in to backstop liquidity and reassure markets that banking systems will remain operational. In addition, U.S. banks recently passed their stress tests, providing assurances that they have sufficient liquidity to navigate choppier financial waters.
  • Following its meeting earlier this month, the Fed cited risks associated with the Brexit vote as a contributing factor in its decision not to raise rates at that time. With the outcome of the British vote decided, the potential for a July increase has been virtually erased, and the probability of a September hike has fallen significantly. In conjunction with the decline in Treasury rates and reassurances of liquidity, commercial real estate investors could benefit from low lending costs. Although lender spreads generally widened in the aftermath of the Brexit vote, interest rates remain highly favorable for investors.
  • The greatest downside risk remains that falling equity markets could create sufficient fear that investors begin a sell-off, similar to what happened at the beginning of the year. These contagion-related fear-induced risks could weaken business and consumer confidence, slowing the economy and creating downside potential for the economy.
  • The Brexit will likely have little impact on short-term commercial real estate performance as few demand drivers will be influenced. Apartment demand in the second quarter appears quite robust, with positive demographics and long-run hiring momentum supporting the sector. The outlook for office and retail properties is more mixed, depending on how consumers and businesses perceive the news. Should confidence falter, demand for these property types could soften modestly, but restrained construction will remain an important factor supporting the performance of these asset types. Industrial properties are positioned to benefit from the Brexit as the strengthening dollar could lift imports of foreign goods, though potential downsides exist for U.S. manufacturers that export.
  • While the Brexit decision has elevated short-term uncertainty that will likely translate into greater investor caution, it could also potentially boost commercial real estate sales in the mid to long term. Downward pressure on interest rates will benefit investors, while the appeal of hard assets with favorable yields could draw additional capital to the sector. The depth and duration of volatility surrounding the event will significantly influence the ramifications for investment real estate. However, barring an unanticipated major economic setback or consequences stemming from the Brexit, the prospects of significant downside risk are limited.

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.

Gains in Home Sales Posted During April As Low Interest Rates, Positive Economic Trends Align

June 14, 2016

  • The increase in sales of previously owned homes and new single-family residences in April illustrates growing demand for owner-occupied housing and the improving ability of prospective homebuyers to save for downpayments and handle monthly mortgage obligations. Interest rates on residential mortgages remain near historic lows, maintaining housing affordability and stimulating a higher volume of single-family home purchases even as prices continue to rise and for-sale inventory remains limited. Low interest rates and a slight moderation in mortgage lending criteria will continue to propel the single-family home market in the near term, and builders could be encouraged to introduce more starter homes to the construction cycle to capture rising demand.
  • The stability of the labor market and modest income growth continue to enable a transition into owner-occupied housing, supporHome-Prices-Risingting an increase in purchases. Sales of existing single-family residences excluding condominiums rose 6.2 percent over the past year to push up the median price to $235,400, a new high in the post-recession period. Inventory remains tight, however, signaling that some demand may remain unfulfilled and that prospective buyers will continue to confront rising prices and keen competition. The supply of single-family homes for sale compressed to 4.5 months in April. A six-month level of supply is regarded as equilibrium, and the market has been below that mark since June 2012.
  • Despite rising demand for single-family homes, developers continue to encounter obstacles to accelerating production. Annualized, construction started on 778,000 single-family residences last month, significantly less than the long-term average. Homebuilders are focusing heavily on trade-up homes at the exclusion of so-called starter homes, as evidenced by a rise in the median price to nearly $322,000 in April. Builder confidence remains high, however, and contractors could broaden the mix of offerings to include models with entry-level prices in the coming months to attract a larger share of homebuyers.
  • The homeownership rate has sunk from a high of 69.2 percent prior to the recession to 63.5 percent in the first quarter, the lowest point in over 20 years. Apartments have captured a considerable share of housing demand, and U.S. apartment vacancy nominally rose in the first quarter to 4.2 percent, or roughly 100 basis points below the long-term average. Approximately 285,000 units are on track for completion this year, the high point during the current cycle, and while pockets of overdevelopment will likely emerge in select submarkets of major metros, demand remains strong and the absorption of nearly 258,000 units will keep vacancy near historical lows.
  • The healthcare industry is evolving and medical providers are taking a more patient-centered approach, encouraging new development to follow rooftops. Ambulatory care centers, urgent care offices, outpatient services and physicians are locating near residential subdivisions to better serve the community. This year, an estimated 12.2 million square feet of medical office space will come online, and a large share is away from hospital campuses.

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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