Not All Job Growth Is the Same for CRE

SAN DIEGO—Occupiers of one real estate product type can increase faster than others, driving demand for a specific type of space over another, CBRE's research manager Michael Combs tells GlobeSt.com. A recent employment report from the firm revealed that San Diego's unemployment rate decreased 30 basis points to 5% following 90-basis-point increases in June and July. We spoke exclusively with Combs about employment trends in San Diego and how they relate to the commercial real estate market here.

GlobeSt.com: What relationship do current employment trends have on San Diego's commercial real estate market?

Combs: Commercial real estate is strongly tied to the health of the labor market. As employers add jobs, naturally, they increase their demand for space. Historically, job growth has generally correlated with positive absorption, both of which signal demand for CRE space.

It is important to remember, however, that not all job growth is the same for the commercial real estate market. Occupiers of one product type can increase faster than others, driving demand for a specific type of space over another. Additionally, job creation in high-wage sectors can more positively affect product types like retail and medical, since these sectors largely serve the local population, and more wages generally translates to increased spending on these services.

GlobeSt.com: Which sectors of the CRE industry stand to benefit from current job trends, and which could suffer?

Combs: The strongest recent job growth has been in medical office and healthcare product type, as well as tourism sectors like hospitality and recreation. Retail and restaurant job growth has been stronger as well, and can benefit additionally if tourism sectors continue to see job growth. Industrial sectors have been very hot over the past two years, with jobs growing at around 4% on average, but those sectors have cooled rather significantly over the past couple of months. Employment of office occupiers has fluctuated more than other sectors recently, but has still grown at around 2% on average over the past two years, which is modest, but not concerning by any means.

GlobeSt.com: What direction do you expect employment trends to take here over the next six months?

Combs: Private-sector job growth has cooled rather significantly in the past two months, compared to recent years, but we are still seeing positive growth, just at a slower pace. A couple of months of slower growth is not enough to indicate a trend, but I could see year-over-year job growth staying relatively cool around 2% in the near future in the private sector, specifically in the office, industrial and retail sectors. In previous years since coming out of the recession, these sectors have tracked closer to 3%. In the longer term, there will almost certainly be even more cooling in the national and global markets, but it should not be a serious or sustained market contraction for San Diego like we have observed in the past decade.

GlobeSt.com: What else should our readers take away from your most recent jobs report?

Combs: The fundamental indicators of the labor market remain solid. People can occasionally get too caught up in one or two modest job reports, or focus too much on seasonal fluctuations, but the region is still on track to add more than 30,000 jobs in 2016 while adding to the labor force and reducing unemployment. San Diego is also made up of a base of “recession-resistant” sectors like defense, healthcare, tourism, life sciences and other high-tech sectors. While we of course cannot predict the future, as we approach an inevitable cooling period of the global market cycle, demand from tenants in the region may slow, but should remain relatively stable.

SAN DIEGO—Occupiers of one real estate product type can increase faster than others, driving demand for a specific type of space over another, CBRE's research manager Michael Combs tells GlobeSt.com. A recent employment report from the firm revealed that San Diego's unemployment rate decreased 30 basis points to 5% following 90-basis-point increases in June and July. We spoke exclusively with Combs about employment trends in San Diego and how they relate to the commercial real estate market here.

GlobeSt.com: What relationship do current employment trends have on San Diego's commercial real estate market?

Combs: Commercial real estate is strongly tied to the health of the labor market. As employers add jobs, naturally, they increase their demand for space. Historically, job growth has generally correlated with positive absorption, both of which signal demand for CRE space.

It is important to remember, however, that not all job growth is the same for the commercial real estate market. Occupiers of one product type can increase faster than others, driving demand for a specific type of space over another. Additionally, job creation in high-wage sectors can more positively affect product types like retail and medical, since these sectors largely serve the local population, and more wages generally translates to increased spending on these services.

GlobeSt.com: Which sectors of the CRE industry stand to benefit from current job trends, and which could suffer?

Combs: The strongest recent job growth has been in medical office and healthcare product type, as well as tourism sectors like hospitality and recreation. Retail and restaurant job growth has been stronger as well, and can benefit additionally if tourism sectors continue to see job growth. Industrial sectors have been very hot over the past two years, with jobs growing at around 4% on average, but those sectors have cooled rather significantly over the past couple of months. Employment of office occupiers has fluctuated more than other sectors recently, but has still grown at around 2% on average over the past two years, which is modest, but not concerning by any means.

GlobeSt.com: What direction do you expect employment trends to take here over the next six months?

Combs: Private-sector job growth has cooled rather significantly in the past two months, compared to recent years, but we are still seeing positive growth, just at a slower pace. A couple of months of slower growth is not enough to indicate a trend, but I could see year-over-year job growth staying relatively cool around 2% in the near future in the private sector, specifically in the office, industrial and retail sectors. In previous years since coming out of the recession, these sectors have tracked closer to 3%. In the longer term, there will almost certainly be even more cooling in the national and global markets, but it should not be a serious or sustained market contraction for San Diego like we have observed in the past decade.

GlobeSt.com: What else should our readers take away from your most recent jobs report?

Combs: The fundamental indicators of the labor market remain solid. People can occasionally get too caught up in one or two modest job reports, or focus too much on seasonal fluctuations, but the region is still on track to add more than 30,000 jobs in 2016 while adding to the labor force and reducing unemployment. San Diego is also made up of a base of “recession-resistant” sectors like defense, healthcare, tourism, life sciences and other high-tech sectors. While we of course cannot predict the future, as we approach an inevitable cooling period of the global market cycle, demand from tenants in the region may slow, but should remain relatively stable.