Weak Jobs Report Another Bump in Road to Recovery
For the second consecutive month, the pace of job creation in the United States slowed measurably, stirring fears of another disappointing chapter in the struggle to stage a durable economic recovery. This back-to back-disappointment in the domestic economy happens at a transitional time in Europe, as reflected in the election results from France and Greece, all of which add to volatility and renewed concerns. In other words, below-trend growth persevering through macro headwinds remains intact as the theme of this recovery.
Conflicting data and the seemingly unending stream of fits and starts continually challenge real estate investors navigating the current environment. Key mandates in this prolonged era of uncertainty include a balanced perspective as well as a decisive, yet flexible, investment strategy. Investors need a plan that not only lowers risk but at the same time, keeps the gates open to unique opportunities. Recognizing the challenge inherent in this, a historical perspective may be helpful. History reminds us that a recovery from the simultaneous shocks of a financial crisis and a major recession require significantly more time and stimulus than a cyclical contraction, a process that could extend five to eight years compared to the more typical two- to three-year span following a cyclical recession. The pattern observed thus far since the recovery began is basically normal if not a bit better than expected. Secondly, the magnitude of the crisis called for unique and unprecedented remedies, the repercussions of which cannot be resolved quickly, in the United States and elsewhere. The corollary effects of reduced public and household debt, e.g., lower spending and higher taxes, must occur at some point, both of which stunt growth. The timing and magnitude of austerity is the subject of much debate as too much, too fast can result in another recession, and too little could culminate in another debt downgrade and the implications inherent in such an event.
This is not to say the economy cannot or will not grow at a relatively healthy pace, just well below potential. In fact, the U.S. economy continues to defy head winds and political paralysis thanks to its market-driven and entrepreneurial foundation. Since the bottom of the recession, the domestic economy has grown by $860 billion, which is more than the size of the economy of Indonesia and nearly triple that of Greece. The rather underwhelming growth rate of 2% to 2.5% may not be enough to bring down unemployment rapidly, but it is enough to generate two million jobs each year, which is just about our current annual run rate.
Also, defining just what engenders a “full recovery” and the composition of new jobs created represents another integral contribution to a balanced perspective. The Great Recession claimed 8.78 million jobs, nearly 2 million of which were in the construction sector and 560,000 of which were in financial activities, the frothiest segments of the economy prior to the crash. The pre-recession levels of employment in these sectors were simply temporary and should not be viewed as the norm. So far in the expansion, over 4.2 million private-sector jobs have been created, nearly half of which occurred in the past year alone. Accounting for the disproportionate losses in construction and financial activities, the recovery to date has been much better than headline numbers would suggest.
Despite the setback of the last two months, the average pace of job growth has doubled to 200,000 per month in the past six months compared with the prior six-month period. Admittedly, this trend may come under pressure if companies become overly cautious in response to rising fear contagion in the financial markets, but employment growth and most other economic indicators still point to a stronger economy, improved end demand, and companies’ need for workers at an organic level. Uncertainty has circumvented the natural progression of cyclical payroll expansion and, at least for the next 12 months, the trend line will reflect a frustratingly gradual recovery path in jobs and therefore, most sectors of commercial real estate. However, the regained strength in our economic base should be acknowledged and not overshadowed by skepticism.
Diverse sectors will continue to lead the recovery, including business and professional services, education and healthcare, trade and transportation, technology, leisure and hospitality and manufacturing. The broad spectrum of job creation offers another positive economic measure and supports the notion of a sustainable but slow recovery and points to metro-level differences in performance. Markets with high exposure to energy, education, healthcare, technology and trade will continue to dominate job growth.
Low interest rates, the silver lining of the era of caution and uncertainty, combined with increased financing sources, form an important cornerstone of a strategy to capitalize on CRE investment opportunities. Modest levels of new construction, employment growth and improving occupancy signal rising NOIs and price appreciation over the next three to five years. Prices for top-tier, Class A assets in primary and more recently, secondary markets have escalated, but the vast majority of the marketplace has achieved price stabilization, not major gains. The cyclical bottoming of prices and improving fundamentals, together with the incredibly low cost of debt, now fuels investment activity across a broader spectrum of properties by quality and location. Investment sales during the first quarter of 2012 increased by 27% over the same period last year while the dollar volume rose by 46%. The slow and steady rise in economic vitality will eventually kick into more of a “normal” economic expansion, but is strong enough in the meantime to spur a more inclusive commercial property investment cycle going into the second half of 2012.
Hessam Nadji is senior vice president and managing director of Marcus & Millichap Real Estate Investment Services. He is also the interim managing director of Institutional Property Advisors, Marcus & Millichap’s special division designed to serve the unique needs of institutional and major private multifamily investors. Contact him at firstname.lastname@example.org.
About Marcus & Millichap
Since 1971, Marcus & Millichap has been the premier provider of commercial real estate investment services. Through the depth of its local market knowledge, the firm has established itself as a leading investment real estate company with more than 1,300 agents throughout the U.S. and Canada. The firm recently formed Institutional Property Advisors (IPA), a brokerage division serving the unique needs of major and private institutional investors.