The Commercial Real Estate Environment Keeps Getting Better: C&W Research Report

Commercial real estate markets across  the  U.S. continued to improve in the second quarter. One important reason for this has been rising employment driving higher demand. That trend continued in July.

  • The U.S. economy continues to add jobs at a healthy pace, indicating that businesses are confident that demand for their  products is rising and they need to increase output. In July, the  economy  added  215,000 jobs, the third consecutive month  that  nonfarm  payroll employment increased by more  than  200,000  jobs. Since winter ended  in March, employment has increased an average of 223,000  jobs per month, up from 195,000 in the  first three months of the year. Job growth in both May and June was revised  slightly higher. Compared to a year ago, there are 2.9 million more people on payrolls, continuing the trend of strong job growth that emerged in the second quarter of 2014.
  • The economic environment for commercial  real estate keeps getting  better. The  U.S. economy is on pace to add more  than  2.5 million jobs in  2015, boosting demand  for all kinds of commercial real estate, and setting  the stage for tightening markets  and rising rents.
  • Employment in the  three  main office-using sectors (financial, professional  and business services,  and information) grew by 59,000  jobs, indicating continuing strong demand  growth for office space across  the  U.S.
  • The July U.S. employment report virtually guarantees that  the  Federal  Reserve’s Open  Market Committee will raise short term interest rates at their next meeting in September.
  • Wages  continue to  increase,  but at a moderate pace.  Average hourly  earnings  rose 0.2% in July and were up 2.1% from a year ago, the seventh consecutive month  that  earnings  were  up 2.0% or  more  from a year earlier.
  • Labor markets continue to tighten. The unemployment rate  held steady  at 5.3% and the underemployment rate  (unemployment plus discouraged workers and others) dropped to 10.4%, the lowest  level since June 2008.
  • Signs point to faster wage growth in the  second half of 2015, which should  boost income and spending at a faster clip during the third and fourth  quarters.

The details of the July employment report were for the most part positive.

  • Job growth was broad-based in July, with 64.4% of the industries tracked by the labor department reporting higher employment in July than June, the highest percentage since last December.
  • The  unemployment rate remained stable at 5.3%, the lowest level since early 2008.
  • Employment  in manufacturing increased by 15,000 jobs, the fastest pace since January. Over the  past 12 months,  the  economy  has added 159,000  manufacturing  jobs, bringing employment in this important sector to its highest level since February 2009.
  • Office-using  employment- the  sum of  financial services, information and professional and business services – rose by 59,000  jobs as all three sectors grew.  Financial services employment has accelerated, and over  the past 12 months has increased by 156,000 jobs- marking the fifth consecutive month  that annual growth  has exceeded 155,000. We have not seen that kind of growth in financial services since 2006.

The lack  of growth  in wages has been one  of the biggest disappointments of the current economic expansion, and while this employment report had some positive signs on the earnings front, we need to see more growth before we can say wages are growing strongly. In July, average hourly earnings increased 0.2% after a small decline in June.

Compared to a year ago, earnings were up 2.1%. The good news is that the increase in earnings is a true increase in spending power because there is no inflation. In June, the consumer price index stood 0.1% above its year-earlier level. With no inflation, higher earnings equals more spending power.

Economy calloutCurrently, inflation-adjusted earnings are growing at their fastest pace since 2009, however, the overall pace of wage growth is still low by historical standards. In 2007 and 2008 earnings were rising 3.0% to 3.5%.

Last week  we discussed  the  drivers of Federal Reserve  monetary policy, noting that in the FOMC’s announcement after its latest meeting, the focus was clearly on labor markets. As long as employment continues to grow at a healthy pace, there is no need to hold interest rates as low as they are. Today’s report supports the expectation that the FOMC will raise the Federal funds rate at the next meeting in September. Unless something disastrous happens over the
next five weeks, we expect the Fed to start increasing interest rates in September and most probably raise rates again in the fourth quarter.

The  economy  is in solid growth  mode. The only missing component is stronger wage growth to support more consumer spending. All the data  point to  faster wage growth, but it is not happening  yet.

The current environment is a great one for commercial real estate.

  • Job growth is boosting demand for space in all types of commercial  real estate. Office space demand is rising because of rising employment in office-using industries.
  • Demand  for retail and industrial space is also benefiting from strong job growth. More people working  means  more  income  in the  economy  which is increasing consumer spending. Although  U.S. GDP growth in the second quarter was a disappointing 2.3% annual rate, consumer spending increased at a 2.9% annual rate on the back of rising employment. Consumers are spending more in stores and online.
  • Hotel and multifamily demand also receive a boost from strong job growth. In the  hotel sector, more  travel for business and pleasure will boost room  demand. For the multifamily sector, as more people get jobs there should  be more household formations and more demand for apartments.

A strong labor market will lead to higher interest rates and is a great environment for the commercial real estate industry.  That is where we are today and expect to be through the second half of 2015.

Click this link to find the original report on Cushman & Wakefield website

Ken McCarthy Cushman Wakefield resized 600


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