Job Numbers Confirm Stagnation, Not Panic

September’s jobs report reinforced our view that the economy entered a period of stagnation a few months ago. It is also further evidence that the cumulative effect of Europe’s lingering debt issues and the political stalemate in the United States have not resulted in corporate panic and large volume layoffs. As I have stated in several past blogs, the economy is on much firmer ground as measured by retail sales, corporate profits, corporate balance sheets, exports and manufacturing readings, all of which are at or above pre-recession peaks. The anchor holding back the natural, if less than stellar, pace of expansion that should be occurring by now is uncertainty.

There are several important and rather positive elements of last month’s jobs report that are worth summarizing. Private sector job gains totaled 137,000.  July and August revisions accounted for net gain of 184,000 jobs, more than twice the number originally reported. Even in the midst of August’s political and financial markets turmoil, employers added more jobs than initially expected. Last but not least, private sector jobs over the past year have been broad-based with professional and business services adding 561,000 jobs, followed by healthcare and education at 450,000, trade/transportation adding 325,000 positions and even manufacturing adding nearly 200,000 jobs. This indicates a diverse level of organic growth throughout the economy although the total numbers are still well below potential. The energy price spike and earthquake in Japan earlier, the effects of which are now fading, may have contributed to the summer slow down more than initially thought. Notwithstanding some of these recent positive factors, we are still in a period of heightened risk and vulnerability to additional shocks.

Reinforcing positive trends for commercial real estate owners and investors, preliminary third-quarter readings indicate relatively stable occupancies across major property sectors with apartments and office showing slight improvement and retail weakening a bit. In short, we are clearly nowhere close to a true economic expansion or a robust recovery cycle in the CRE market, but given the array of bad news and headwinds that piled up over the past several months, the economy is showing a respectable level of resilience. 

Investors still have to navigate a tight band of risk and reward since the long-term solutions to job creation in the United States and debt resolution in Europe still seem elusive. President Obama’s proposed jobs bill, if passed, is expected to make measurable contribution to job creation over the next 12 months; however, a substantial removal of uncertainty may require the full election cycle to materialize. In the mean time, owners waiting for sizable improvement in NOIs are coming to terms with a gradual recovery as the most likely scenario for the next 12 months to 18 months. Maturing loans in the next two years still have to be reconciled with adjusted values and refinancing/restructuring options in many cases. This trend is likely to bring more inventory to market as low interest rates and ample capital seeking yield are gradually resulting in rising commercial property sales velocity beyond the top-tier segment of the marketplace. On the buy side, caution and reward for risk prevails but stable Class B assets in top-tier and some secondary markets will be the beneficiaries of an emerging period of “controlled enthusiasm” for higher-yielding assets with limited downside. 

Investors locking in low interest rates with realistic short-term rent growth expectation and the wherewithal to improve operations and execute well-balanced, value-added strategies are likely to be richly rewarded over the next five to seven years. In other words, patience with an active plan for seeing the right buying opportunities appears to be the best mix in this environment.

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 hnadji@ipausa.com.