Jobs Appear, Disappear, Slowly Reappear

NEW YORK CITY—The national unemployment rate when GlobeSt.com launched in July 2000 had seen little movement since the beginning of the year. For that month the Bureau of Labor Statistics reported 4.0% joblessness, as it had for two months prior to that. Earlier this month the BLS reported national unemployment of 5.3%; a lot of water has gone over the dam between the posting of these two statistics, and not only in terms of the jobless rate moving up or down.

Commercial real estate's reliance on job growth cannot be overstated. Job growth leads to demand for space of all types—residential and retail as well as office—which in turn leads to development. To some extent, this growth engine went in reverse during the 2001 recession, but at a much less accelerated pace than it did following the onset of the 2008 global downturn.

Even so, some six months after GlobeSt.com launched, local market headlines were dotted with stories of increasing office vacancies as the dot-com bubble turned into the dot-bomb. However, there were strongholds of resistance even in tech-heavy markets. In Austin, for example, office occupancy remained above 90% even with the sudden wave of available sublease space, Justin Garrett, then the research director at Transwestern, told GlobeSt.com in February '01. The Texas capital, said Garrett, has a “recession-resistant economy,” thanks to its wealth of global companies, the vast number of skilled college graduates who want to continue living in the city and the region's quality of life.

Garrett's assessment of Austin applied more broadly across the US. A GlobeSt.com Big Picture report a few weeks later noted that “the adage about putting too many eggs in one basket is coming into play as the national economy takes a dip. Markets with a diverse economy are either faring well or experiencing minimal disruptions, while those dependent on one or two industries are bracing for the worst.” In Chicago, for example, the market's diverse economy gave it “a fighting chance of surviving what some captains of industry here are already calling a recession,” even as the Windy City was home to the country's third-largest tech market.

Another burgeoning tech center amid a diversified economy, New York City, was not only withstanding the dot-com downturn but expanding, as well. “This city is kind of like Madonna--it's always reinventing itself,” Ann Gardener Kayman, then SVP of the New York City Economic Development Corp., said at an Association of Real Estate Women panel discussion on the Long Island City neighborhood of Queens, which was drawing some of the tech-tenant spillover from what was then called Silicon Alley.

At that time, New York's tech center was not what it would become following the onset of the downturn. Fifteen years ago, few would have anticipated a tech company buying a 2.9-million-square-foot office building there. Yet that's what Google did in late 2010, paying $1.9 billion to acquire 111 Eighth Ave., where it occupied 500,000 square feet of office space.

In the aftermath of the collapse of Lehman Brothers and other tumultuous events in mid-September 2008—which wiped out many financial services jobs that have not reappared—it seemed as though corporations would be shrinking for the near term, rather than expanding. The unemployment rate, which had begun ticking upward in May of that year, kicked into higher gear, reaching 7.3% by year's end and peaking at 10.0% the following October.

In all, 8.7 million jobs disappeared nationwide during the downturn, or 6.1% of all payroll employment. The contraction was twice as severe as the deep recession of 1981 and 1982, even though the jobless rate hit a postwar high of 10.8% as '82 ended.

By the start of 2010, the tide had begun turning, although national unemployment would not fall below 9% until the third quarter of 2011. A first-quarter '10 National Office Trends report from what was then Cassidy Turley (which merged with DTZ at the beginning of this year) found that office absorption during that three-month period totaled a negative 3.6 million square feet nationally.

Kevin Thorpe, the firm's chief economist, told GlobeSt.com that while office-using jobs were on the rise, there would be an average lag time of two to three quarters for positive absorption. Cassidy Turley predicted that matters would begin improving around the third quarter of '10. After that, “the last leg is rent growth,” Thorpe said. “We're a ways off as a country before we see office rents rising.”

And as Thorpe anticipated, meaningful rent growth in the office sector was still a few years away, as was meaningful growth in demand. In fact, Savills Studley reported recently that owners of class A space in many office markets saw their first landlord effective rent increases of the current cycle in 2014

“The coasts are doing very well,” Albert Lindeman, SVP with Sperry Van Ness, told GlobeSt.com in July of last year, citing New York City and San Francisco. “When you get into the energy sector, Denver and the Texas markets are growing dramatically.” In secondary markets such as Charlotte as well as Lindeman's home base of Chicago, the expansion of tech tenants contributed to growth. “So there are some very good high points, but overall it's pretty much lackluster.”

Its viability no longer dependent on dot-com start-ups as it was 15 years ago, the tech sector has been a spur to growth in the past couple of years. And it's not confined to such industry hubs as Northern California, New York City or Boston. Thanks to talent clustering, smaller cities have begun getting in on the act.

“For the past two years, the high-tech industry has not only spurred the economy as a whole, but it has been the top driver of commercial office activity, influencing rents and vacancy in major markets across the US,” John Frager, executive managing director of CBRE's tech and media practice, said this past April. Although tech talent comprises just 3.4% of the total US labor pool with 4.4 million employees, the industry accounted for more major US office leasing activity than any sector over the past two years. In 2013, tech's share of major leasing deals was 13.6%, last year, it climbed to 19%, according to CBRE.

One employment sector which has proven largely recession-proof is healthcare. It has grown steadily over the past several years, even prior to the advent of the Affordable Care Act. “It is a simple fact that as people get older, their demand for healthcare services increases,” Scott Peters, chairman, CEO and president of Healthcare Trust of America, told Real Estate Forum as the ACA took full effect early last year. “This is especially true for the Baby Boomer generation that demands higher levels of service in general. We see that as a growth opportunity for the medical office sector—especially for our physician and health system tenants who will need more space (and nurses and therapists) to meet this increase in demand.” Administrative support—and therefore a requirement for office space—for health insurers has also been a growth area.

Wherever the growth is coming from, industry economists feel that job growth, and with it demand for commercial space, has finally gotten onto firmer ground. “Supported by positive manufacturing and service-sector activity, the US economy has settled into a steady pace of economic growth with strengthened hiring trends,” writes Hessam Nadji, senior EVP and managing director of research and advisory services at Marcus & Millichap. “Total employment has passed its pre-recession peak, adding back the 8.7 million jobs lost during the recession.”