As I sit here to write this week's entry, I can't help but thinkthat my writing has had a pessimistic slant of late and thatbothers me. As a broker, just like any of you other brokers outthere (or anyone in the real estate business for that matter), Ihad optimism injected into my DNA when I was born. I remain anoptimist but when it comes to the market, I have to call it how Isee it. Things are not pretty. I don't think I am beingpessimistic, just realistic.When I hear the government come outwith "official" numbers, I am reminded of a famous quote from MarkTwain: "There are three kinds of lies, lies, damn lies andstatistics. " Well, maybe they are not technically lies butcertainly, upon further investigation, it is easy to see howthe figures presented can distort the truth and mislead the casualobserver.Last week, we looked at the 4Q09 GDP growth and came awaywith an understanding of what that growth consisted of and theramifications on commercial real estate. This week we shalllook at what really was behind last week's officialannouncement that the U.S . unemployment rate dropped from 10% to9.7% in January.If you are a frequent reader of StreetWise you knowmy perspective on employment. It is the metric that has themost profound impact on real estate fundamentals. So the drop inthe official rate should bode well for commercial real estate,right? Well, not so fast. Let's take a closer look.In January, thelabor market shrunk by 20,000 jobs, yet the rate declined. How canthis be? elementary math tells us that this is counterintuitive.There are two answers to understanding how this could occur.Themost common explanation is that, while the number of jobs shrank,what is called "the participation rate" declined. The officialunemployment rate does not count those who are out of work andwould like to be working but stop looking for more than 30days because they are dejected. This can play havoc with theofficial rate.If enough workers drop out of the search for a job,even with large reductions in the workforce, the rate can dropsignificantly (the participation rate declines). Conversely,with tangible job growth, the official rate can rise as encouragedunemployed citizens get back into the group of those who areactively searching for a job (the participation rate increases).Inaddition to fluctuations in the participation rate, seasonaladjustments are made to the data. These seasonal adjustmentsrepresent what the government's computers think ought to havehappened during a particular season of the year. For instance, ifwe look at the Department of Labor's dataand, particularly, their "Employment Situation", we seethat in January "Men, 20 Years and Over" the non-seasonallyadjusted figures showed a reduction of 914,000 jobs. After seasonaladjustments, this figure drops to a mere 1,000. The government datashows that, without the adjustments, the real unemployment rate wasabout 10.6% in January.What all of this means is that the rateitself is not as important as the net number of jobs created. Thisis especially important for our real estate fundamentals.Whether people are looking for work or not (the participation rate)doesn't affect occupancy rates in commercial buildings and computergenerated seasonal adjustments don't get apartments rented. Andwith seasonal adjustments, the numbers have to "true up" within ayear. This is why in January, a revision (the government lovesrevising data) was made to the 2009 data which indicated there wereactually about 550,000 more jobs lost than the official dateshowed.So each month, look at the net number of jobs gained orlost, forget about the official rate. In order for real estatefundamentals to improve, we need job growth and a lot of it.During this recession our economy has lost over 8 millionjobs. These job losses have been punishing to our consumer spendinglevels and our apartment houses, office buildings, retailproperties and hotels. The government estimates that, in2010, our job market will grow by an average of 90,000jobs per month. Something we must keep in mind is that our economyneeds 100,000 (some estimates are as high as 130,000) jobs createdper month just to keep up with population growth. In order toregain a good portion of those 8 million jobs lost within areasonable period of time, how many new jobs do weneed created each month? 200,000? 300,000? You can figure outhow long it will take even at these rates.Democrats say thatat the end of 2008, our economy was shedding jobs at the rate of600,000 to 700,000 per month and that today's only modest monthlylosses are an improvement. Republicans say that the administrationwasted a year focusing on healthcare and cap-and-trade andjust now is getting around to jobs. As Realestatarians, whatwe need to help our market achieve sustainable recovery arejobs.When I write about the need for jobcreation, I receive many emails about what I thinkare the best methods to stimulate job creation. After all, "Thepresident is not a miracle worker", one reader conveyed with adefensive tone. While I am far from an economic strategist, hereare a few ideas:Tax Policy: One of the mostcommonly mentioned reasons why employers are not adding new workersis due to the uncertainty they are feeling about future tax policy. The printing presses at the Treasury are smoking like a40 year-old pickup truck chugging down a dirt road due to almost 24hour operations to double our money supply in just one year.Inflation, higher interest rates and, of course, higher taxes areexpected due to this reality. Discussing spending cuts here wouldonly be a waste of keystrokes (as no politician from either partyseems to have the intestinal fortitute to cut spending in ameaninful way) so the only option for a rational thinker to assumeis higher taxes on everyone.After a campaign vow of no taxincreases for 95% of Americans, the president now says he is"agnostic" about tax increases. What does that mean exactly? I haveheard six different interpretations of that rhetoric. Moreuncertainty is not what we need.Does the administration reallybelieve a "jobs program" featuring a payroll tax credit is going tocreate jobs? Would you go out and hire a $40,000 plus benefitsemployee because you were going to get a one time 5,000 tax credit(just ask Jimmy Carter how effective this mechanism was)? Not ifconsumer demand did not justify the position and especiallynot if you think your taxes are going to go up substantiallyin the near term.The administration should set a tax policy whichcan be relied on for the next three years, or longer. Will they letthe Bush tax cuts sunset? Some days the implication is yes, somedays no, and some days maybe for some income levels and not forothers. Markets hate nothing more than uncertainty. Simplify andconfirm what tax obligations will be moving forward and employerscan make decisions with more comfort.Additionally, the recentlyreleased U.S. budget contains a set of proposals headed"Reform U.S. International Tax System". If these proposals areenacted, over the next decade, multinational firms will face a$122.2 billion tax increase. The fundamental assumption behindthese proposals is that U.S. multinationals expand overseas only toexport jobs out of America. The thinking is that taxing theirforeign operations more would boost tax revenue here and createdesperately needed U.S. jobs. This is simply incorrect.These taxincreases would not create American jobs, they would destroy them.Many independent studies have consistently found that expansionabroad by U.S. multinationals tends to support jobs based at home.Moreover, these studies find that more investment and employmentabroad is strongly associated with more investment and employmentin American parent companies.Setting tax policy that can be reliedupon is critical.Stimulate Consumers: Whytake tax dollars from consumers, have the government sprinklein some waste, fraud, abuse and corruption (both parties areexperts in this area) , and send the dollars, less the aforementioned seasoning, back to the consumers in the form ofassistance, entitlements or bailouts? Why not just leave them withmore after tax dollars? Then 100% of the money gets into theconsumer's hands. When you consider that 50% of U.S. taxpayers payless than 1.5% of their income in taxes, you can see why thenaysayers do not endorse tax cuts.The case for tax cuts asdeficit-fighting and consumer bolstering has never been more valid,since getting the tax base growing is the only way to escape aneven bigger fiscal and monetary crisis. A swift and ideologicallyunembarrassed demonstration of bipartisan action to save theeconomy from untimely tax hikes would enhance the country'sconfidence in the president and his approach togoverning.Trade Agreements: The presidentsaid last week that if we can double our exports, our economy wouldgrow by 2 million jobs. If he really believes this, why have threetrade agreements been collecting dust on his desk since he tookoffice? Negotiated trade agreements with Panama, Korea and Colombiaare sitting in the president's in-box and have been since he movedinto the Oval Office. Several others are beingnegotiated with Malaysia, Thailand, the UAE and the SACU.Freetrade agreements help open markets and expand opportunitiesfor American workers and businesses as they can enter andcompete more easily in the global marketplace. Organized laboris clearly against these agreements and we have seen, first hand,how indebted the White House feels to these supporters based uponthe gift wrapping placed on GM and Chrysler, their untouchedpension plans, and the special deals they were getting in both theHouse and Senate versions of their healthcare bills. Don't expectany action here until after the mid-termelections.Infrastructure: A good percentageof unused stimulus money should be invested in an InfrastructureBank. Infrastructure spending, in real dollars, is about the samenow as it was in 1968 when our GDP was about one-third the size itis today. Is it a surprise that, in a 2009 report, the AmericanSociety of Civil Engineers gave our infrastructure a failing gradeof D?Over one-quarter of our nation's bridges are structurallydeficient or functionally obsolete and nearly 200 cities have"brownfield" contaminated waste sites in need of clean up andredevelopment. State and local governments, which account for about75% of infrastructure spending, have terrible budget problems whichhave caused a growing backlog of economically viable projects thatcannot be financed.The writing is on the wall: our aginginfrastructure will eventually constrain economic growth. TheInfrastructure Bank could invest, in conjunction with privatecapital, in merit-based projects of national significance thatencompass both traditional and technological infrastructureincluding roads, airports, bridges, high-speed rail, smart gridsand broadband.The bank could attract private funds to co-invest inprojects that pass rigorous cost-benefit analysis to avoidproverbial and actual bridges to nowhere. These projects couldgenerate revenues through user fees or guarantees from state andlocal governments. This investment/spending would create real jobs,especially in the construction industry, which accounted for about1 in every 4 jobs lost last year.AcceleratedDepreciation: Since the 1950's, there has been astrong correlation between domestic job growth and businessinvestment. To aid job creation, we need businesses to increasecapital investment. This is particularly true forwell-paying industrial jobs in capital-intensive industries.The best way to do that is to allow businesses to significantlyaccelerate depreciation of their capital purchases.In a 2001analysis, the Institute for Policy Innovation estimated that every$1 of tax cuts attributed to accelerated depreciation generates awhopping $9 of GDP Growth. Economists have rated this stimulus asone of the most productive of our time.Last year, the presidentincluded a one-year extension of accelerated depreciationprovisions in the American Reinvestment and Recovery Act. Thisdoubled the amount of capital equipment purchases thatsmall businesses can expense and allowed larger businesses todeduct 50% in the first year. The president recently asked for aone-year extension through 2010. This should be extended for two orthree years.Whatever Congress decides to do, one thing remains afact: commercial real estate fundamentals need job growth more thananything else to find a tangible sustainable recovery. Let's hopethat, with regard to the administration's new focus on jobcreation, we will be able to say, "better late than never".Mr.Knakal is the Chairman and Founding Partner of Massey Knakal RealtyServices in New York City and has brokered the sale of over 1.050properties in his career.

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