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.

First Deals Under New CMBS Rules Clear Hurdles, Lending Spread Ease

September 19, 2016

  • Commercial mortgage-backed security (CMBS) financing slowed dramatically in the first half of 2016 as volatility roiled the debt markets. In addition, new rules governing CMBS issuance that take effect at the end of this year also created uncertainty in the marketplace. However, the first CMBS offerings that comply with Dodd-Frank risk retention regulations were issued in the past month and received strong interest from bond investors. Now that the first risk-retention offerings have been completed, greater certainty in the mortgage bond market will once again make CMBS a viable financing option for commercial property owners and investors.

  • The new risk-retention rules are part of the Dodd-Frank reforms and go into effect at the end of 2016. Under the regulations, CMBS bond issuers must keep 5 percent of the transaction’s value on their books for a minimum of five years, cmbs-volumeor have a B-piece bond investor purchase it. B-piece investors typically purchase the riskiest bonds in a CMBS offering, although their commitment is usually less than 3 percent of the total dollar value. The higher commitment threshold and longer holding period may require B-piece buyers to seek higher yields, placing upward pressure on borrowers’ costs.

  • CMBS offerings that meet the new risk-retention rule came to market since early August. The deals were well received by mortgage bond investors and compressed spreads to some of the lowest points this year, implying a lower cost to borrowers. Currently, CMBS spreads are 235 basis points to 275 basis points above the 10-year U.S. Treasury swap, down from more than 300 basis points over during the second quarter. Although the recent offerings may yet be subject to further review by federal regulators, the initial response buoys the CMBS market that has seen only $41 billion in bonds issued this year.

  • A Federal Reserve survey of lenders indicates that commercial real estate loan standards tightened in the second quarter. Debt providers are likely seeking to balance risk exposure to commercial real estate and take a more conservative lending approach while the current cycle matures, rather than expressing a bearish outlook on commercial property. Some of the greatest tightening occurred for construction loans, a trend that may potentially prevent some early-stage developments from advancing and ultimately minimize the upward pressure of new supply on vacancy rates.

  • Declining vacancy rates and rising rents provide a rich environment for commercial real estate transactions. U.S. multifamily vacancy hit its lowest level in 10 years at 3.8 percent at midyear, but the rate will rise slightly by the end of 2016 as new supply outpaces demand. Rising space demand and muted construction are maintaining vacancy rates in the industrial, office and retail sectors at post-recession lows that bolster investor confidence and support an active and relatively vibrant debt market.

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.