CHICAGO—After nearly eight years of consistent economic expansion, few topics engage commercial real estate professionals more than when the next recession will begin. Few if any expansions have lasted this long, and the anticipation of its end has already started governing plans for new development and investment. More diversity within portfolios, especially by adding recession-proof properties such as student housing and self-storage, seems called for these days. But recent moves by the Trump Administration, including the launch of trade wars with China, Canada and Europe, have added new and unexpected factors that have to be considered along with anticipated ones such as rising interest rates. But the latest jobs report showed a still-healthy economy. Kenneth McCarthy, research director for Cushman & Wakefield, speaks about this new world and how to navigate it.
Q: The US economy added 213,000 jobs in June, marking the 93rd consecutive month employers added to payrolls – how long with this streak last and what will be the biggest determining factors?
A: The economy has certainly had an extraordinary run of job growth. It’s like Joe DiMaggio’s hitting streak, and like that streak, it may never be broken. It’s difficult to predict month to month changes in employment, which can be impacted by so many variables, but it’s probably safe to say that, because of the tax cut and the generally high levels of consumer and business confidence, we are likely to see solid monthly job growth during the second half of 2018. We could see a one month decline in employment sometime in 2019 as the unemployment rate continues to decline and the availability of workers diminishes, but it’s difficult to predict when that might happen.
Q: For commercial real estate, what is most encouraging about the June jobs numbers?
A: For commercial real estate, the overall amount of jobs created is certainly a positive. The fact that job growth has accelerated to 215,000 per month this year compared with 182,000 in 2017 means that economic activity is increasing and that means more real estate is needed. In particular, the number of jobs in office-using industries like financial services and professional services increased by an average of 58,000 per month in 2018, up from 47,000 in 2017. More office-using jobs generally means more demand for office space.
Q: Which employment sectors stood out in June?
A: I have already mentioned office-using employment as a strong plus. Other sectors that stood out in the June report were the construction sector, which added 13,000 jobs in the month and has added roughly 25,000 jobs per month this year. Since 2011 nearly 1.8 million construction jobs have been added to the economy. These construction jobs reflect the other side of the commercial real estate sector, rising supply of office, industrial and multifamily space coming to markets across the nation. On a slightly negative note, retail employment fell by 22,000 jobs. After declining in 2017, the retail sector has seen employment growth in 2018, but it has been modest, reflecting the structural shifts that sector is undergoing.
Q: Recently, some $34 billion in tariffs on Chinese imports took effect officially, with another $16 billion due to take effect in a few weeks. Initial US tariffs on Chinese goods target auto parts, electronic components, jet engine parts, compressors and other machinery. In addition, the US is threatening to impose tariffs on more than $500 billion in Chinese imports. China hit back immediately via duties on US shipments including soybeans and automobiles. What threat does this trade war pose to the US economy, and the commercial real estate market in particular? Do you think a prolonged trade war could tamp down expectations for job growth?
A: The US economy is in the midst of a strong spurt of economic growth driven by high confidence, tax cuts and a supportive global economic environment. Any changes that could negatively impact those supports, such as rising trade tensions, could reduce growth. Perhaps more than the impact on costs, the trade tensions that have emerged in recent months create uncertainty which makes it difficult for businesses to plan and that could also dampen activity. Thus far, the impact has been small and the economy continues to perform well, as we saw with the employment data. However, rising trade tensions, if sustained could slow growth going forward. In addition, trade restrictions tend to lead to higher prices domestically and could boost inflation in the US. Since the trade restrictions are focused on goods there could also be a disproportionate impact on the industrial sector where demand is driven by movement of goods. Any policy that restricts the flow of goods could reduce demand for industrial space.
Q: What impact has the Tax Cuts and Jobs Act had on the US economy in general — and commercial real estate in particular — up to this point, and what impact will it have over the next six months?
A: The biggest impact on the Tax Cuts and Jobs Act can be seen in the employment statistics we have seen this year. The fact that employment growth is accelerating in an economy with a 4.0% unemployment rate and in an expansion that is now more than nine years old is largely attributable to the increase in confidence and spending that the tax act has stimulated. This growth has a direct impact on demand for commercial real estate and will likely continue to do so over the next six months. All sectors of the commercial real estate sector benefit when economic growth is strong.