Tight Labor Market Constrains Job Creation

 

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EMPLOYMENT JUNE 2019
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Research Brief
Tight Labor Market
Constrains Job Creation
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Hiring softens, unemployment rate unchanged in May. Employers added 75,000 jobs last month, maintaining a historically low unemployment rate of 3.6 percent. Downward revisions to March and April’s figures offset May’s gains, taking the average number of new hires to 164,000 per month in 2019. Last year, a monthly average of 223,000 jobs were created.

Apartment housing demand fueled by low unemployment. The slowing pace of job growth has not hampered rental demand, with multiple attributes drawing people to apartment living. These range from greater mobility to on-site amenities, and rentals are often the most cost-effective housing option. As a result, the national vacancy rate fell to 4.8 percent in the first quarter, the lowest first-quarter reading since 2001, despite aggressive construction. Workforce properties in particular are outperforming their historical averages. Minimal availability among Class B and C apartments is generating above-trend rent growth of mid-4 to low-5 percent, well above the traditional 2-3 percent range observed in prior years.

Healthcare, hospitality job creation robust, spurring real estate demand. While overall employment growth is flattening, certain industries are increasing their hiring efforts in 2019. The education and health services sector has added more jobs on average per month this year than in 2018. The aging population is increasing the need for healthcare, benefiting commercial real estate assets near medical hubs. Employment growth is also elevated in the leisure and hospitality sector, as visitation numbers rise in many metros, aiding hotels. The hospitality occupancy rate is at a record high, placing upward pressure on the average daily rate. Barring a substantive change in the macroeconomic environment, hotels should sustain momentum through the rest of this year as supply growth moderates.

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Developing Trends
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Softer job growth strengthens potential for interest rate cuts. May’s employment numbers support expectations for subdued job creation this year as slowing international economies and heightened trade tensions weigh on domestic growth. The Federal Reserve will take these and other factors into consideration when evaluating possible rate cuts.

Low unemployment empowering people to find better jobs.
The number of voluntary job leavers increased by 66,000 to 803,000 people in May, the highest level since February. People have confidence in the job market and are choosing to leave their current roles to find better positions. This trend should add upward pressure to wage growth and could contribute to higher labor productivity. More people who are working part time but want full-time positions are also finding opportunities, indicating more employers are willing to expand hiring criteria, relying on training to bridge skill gaps.
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75,000
Jobs Added in May 2019
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1.6%

Year-over-Year Job Growth
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Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics

 

Low Mortgage Rates and Tight Labor Market Bolster Housing Demand

 

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HOUSING JUNE 2019
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Research Brief
Low Mortgage Rates and Tight Labor Market Bolster Housing Demand
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Housing outlook rises as mortgage rates fall. Existing home sales fell for the second consecutive month in April, as the higher mortgage rates weighed on demand and the limited supply of available homes left entry-level buyers with few options. Though the housing market has had its challenges, builder sentiment is improving, leading to a moderate rise in permit issuance and housing starts.

Housing sector sustains positive demand drivers.
For the first time since January of 2018, mortgage rates dipped below 4 percent. With borrowing costs at 18-month lows, current owners are regaining some of their purchasing power. As rates stay compressed and the supply of available homes continues to increase, overall home sales should rise in the coming months. Despite improving sentiment, the lack of available lots and tight labor markets nationally will keep constraints on new housing development, supporting the sustained appreciation of existing homes and tight vacancies in apartment buildings.

Shortage of available starter homes benefits rental market. As the current business cycle matures and economic momentum slows, consumers are choosing to stay in their first homes longer. These owners are more likely to upgrade their homes through renovations, placing added demand on home improvement and furniture retailers. This restraint on for-sale inventory will keep rental vacancy tight near employment hubs. Many millennials are choosing to continue renting as they favor the amenities and location provided by urban apartments. Those who are transitioning into single-family homes are often pushed to the edges of existing suburbs, where higher land availability and reduced demand increase affordability. As households increase in these areas, investor demand for suburban commercial real estate assets may increase.

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Developing Trends
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Mortgage rates fall; window of opportunity for homebuyers. At the end of May, mortgage rates dipped below 4 percent, the lowest mark since January of last year, priming the housing market for a rise in sales.

Tight unemployment drives demand for workforce housing.
Class B and C apartments have been outperforming as the current cycle extends; however, with economic headwinds mounting, strong rent growth and vacancy trends may moderate in the coming months.

Many homeowners elect renovation over move-up. Low mortgage rates are not only driving housing demand but also increasing consumption. Refinancing opportunities at these lower rates can free up capital for owners to improve their homes. The Remodeling Activity Indicator, which tracks the amount of money spent on home improvement supplies, shows an annual increase in home remodels of 7 percent at the end of the first quarter.

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$269,300
Median Price of Existing Single-Family Homes
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4.2

Months of Existing Home
Supply at Current Sales Pace
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* Through week ending May 24; Mortgage Rate through May 26
Trailing 30-day average
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; National Association of Home Builders; National Association of Realtors; U.S. Census Bureau

 

Steady Retail Sales Momentum Drives Retailer Innovation

 

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RETAIL SALES MAY 2019
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Research Brief
Steady Retail Sales Momentum
Drives Retailer Innovation
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Healthy labor market keeps consumption on solid footing. Retail spending increased steadily in April, rising 3.2 percent on an annual basis and extending a trend of stabilized consumption. The tight job market continues to fuel the retail sector as unemployment rests at a 50-year low, prompting more discretionary spending as employers boost wages to attract talent.

Familiar faces headline steady retail sales growth. Single-tenant-oriented retailers, including bars and restaurants, home improvement vendors and pharmacies, continue to drive spending. Yearly sales growth for these retailers ranged from the upper-3 to upper-4 percent band last month, well outpacing other retail categories. Growth rates for general merchandise and grocery sales were clustered in the mid-2 percent realm, while a variety of other categories recorded negative changes. While spending at single-tenant establishments is further supported by rising levels of discretionary income, performance among these assets has remained consistent as the average cap rate has stayed in a tight range for the past three years. Yields for other commercial property types have shown more deviation during that span, pointing to the stability of the single-tenant sector.

Online ordering helping brick-and-mortar retailers boost efficiency. Historically high consumer confidence is benefiting bars and restaurants as this category has averaged 6.2 percent growth over the past year, outperforming most other retail sectors. Increased food delivery orders are underpinning the accelerated pace of growth; however, they are changing restaurant layouts, encouraging kitchen-only sites to counter rising delivery costs. Opening spaces with no dine-in options reduces space needs, slashing rent expenses as well as overall operational costs. Grocery stores have also adapted to the increase in online ordering, creating more curbside pickup locations.

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Developing Trends
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Consumers reap rewards of low joblessness. The national unemployment rate continued to drop, falling to 3.6 percent with the addition of 263,000 jobs. Consumers are benefiting from the tightening job market as average hourly earnings rose 3.2 percent on a yearly basis in April, on par with the previous six-month average.

Trade tensions could threaten economic optimism. Implications from the recent 25 percent tariff on Chinese goods will likely take several months to reach consumers. Price increases on common goods could weigh on discretionary spending, potentially hampering consumer confidence moving forward.

Restaurants find ways to cut costs. With average spaces about a third the size of a typical restaurant, kitchen-only sites help restaurants significantly reduce expenses and focus strictly on deliveries. While Domino’s has spearheaded this concept, numerous other food vendors will adopt it in the near future.

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3.2%
Core Retail Sales Growth Y-O-Y
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4.0%

Consumer Confidence Index Growth M-O-M
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* Through April
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; The Conference Board; National Real Estate Investor; Real Capital Analytics; U.S. Census Bureau

 

Unemployment Falls to Record Low; Job Gains Sustain Apartment Demand

 

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EMPLOYMENT MAY 2019
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Research Brief
Unemployment Falls to Record Low;
Job Gains Sustain Apartment Demand
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Improved employment growth supporting historically low joblessness. Employers added 236,000 positions in April, bringing the year’s total job creation to 820,000, which is on par with previous years in this cycle. Expanded hiring activity compared with March drove the unemployment rate down to 3.6 percent, its lowest level in nearly 50 years.

More jobs for high school graduates lift demand for affordable rentals. The unemployment rate for individuals without a college education continues to fall, down 80 basis points year over year to 3.4 percent. More employment opportunities for this demographic will encourage household formation and improve demand for Class C apartments. Vacancy for this tier has been lower than for Class A and B measures for more than three years, translating to accelerated rent growth. The average effective rent for Class C apartments improved 5.2 percent year over year in March, compared with 4.2 percent a year ago. Monthly rates for Class A and B rentals rose by lesser degrees, up 4.4 and 4.6 percent, respectively.

Education and healthcare hiring underscore strength of medical offices. Year to date, the education and health services sector has added the most jobs across all major industries. Steadily rising medical school enrollments are helping to meet staffing needs even as the demand for medical services increases with the aging of the baby boomer generation. The unemployment rate among educators and medical professionals sits at 2.3 percent, but 1.3 million positions are still open. Strong hiring in these fields reflects the positive fundamentals of medical offices. Elevated healthcare demand paired with a contracting construction pipeline well below peak levels will tighten the national medical office vacancy rate to its lowest level in over 10 years. Availability is even more contracted in smaller metros. Though firms are hiring across the country, job creation is becoming more prevalent in secondary and tertiary metros as local populations both expand and age.

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Developing Trends
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Tight labor market benefits short-term unemployed the most. In April total unemployment declined by 387,000 individuals, 57 percent of whom had been without a job for less than five weeks. The number of people who have not sought work in more than six months did not substantially change, with the underemployment rate remaining unchanged at 7.3 percent. These measures highlight how individuals with larger gaps on their resumes are still finding it difficult to obtain employment despite historically low joblessness.

Labor shortage widens, sustaining elevated wage growth. As the unemployment pool shrinks, total job openings continue to rise, measuring 7.5 million in March. There are now 1.7 million more open positions than people seeking work. This persistent labor gap kept annual growth in average hourly earnings at 3.2 percent in April, contributing to a 3.2 percent gain in core retail sales over the same span.

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205,000
Average Jobs Added per Month in 2019
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3.6%

Unemployment Rate in April 2019
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Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; AAMC