Grubb's Robert Bach

DO YOU KNOW PEOPLE WHO’VE LOST THEIR JOBS?

Some 65% of the people you will talk with–or at least 65% of the 599 people who took last week’s Quick Poll–can attest to having recession horror stories. They know someone who has lost his or her job. A lucky (insulated?) 25% say they don’t know of anyone. And a sad 10% say that they were the ones with their heads on the cutting block. Keep in mind that the Poll was not real estate-specific, so the comments reflect the respondents’ views of the larger economy. Commentator Robert Bach, SVP and chief economist for Grubb & Ellis, says it’s bound to get worse before it gets better, and when that happens, watch the talk of strong fundamentals just melt away. Here’s his take:

“In the first quarter we lost 232,000 net payroll jobs. By contrast, in the last recession, and the jobless recovery that followed, the labor markets shed 2.7 million jobs. So we’re maybe 10% of the way through this. There’s more to go.

“Now, there’s reason to expect that this recession might be shallow. The Fed has reduced interest rates aggressively and they’ve opened the discount window to investment banks. They’ve been very aggressive and creative in looking for ways to thaw the credit squeeze. Congress and the President passed a $152-billion stimulus package, and those checks will begin to go out next month. So the timing looks pretty good and there’s reason to hope. In fact, that 232,000 jobs is actually low compared with the past six recessions, and that’s another hopeful sign that this could be shallow.

“But, having said that, the two prior recessions each lasted eight months, and after the last one, there was a flatness that lasted 27 months. (That’s why I call it a jobless recovery.) If we assume that the 2007 business cycle peaked in December, we may have another five months to go, and there could be another year after the end of the recession where the labor-market recovery is barely worthy of the title.

“In terms of the real estate community, people will say that the glass is half full and fundamentals are strong. Of course they’re strong. We’ve just begun to shed jobs, and leasing fundamentals are a lagging indicator. We had about 98 million sf under construction at the end of the fourth quarter. Let’s assume a labor market decline of 1.5%, which is just about where it was in the last recession, and that about a quarter of those will be office jobs. This means we’ll see a negative net absorption of about 100 million sf. Could be a little more, actually. That will pump the vacancy rate up to 18%. That’s high, and it’s just about where it was at the end of the last recession.

“And here’s something else people don’t really think about. The vacancy rate at the end of the fourth quarter was 13%. At the beginning of last recession it was 8.5%. We entered into the last recession with fundamentals that were much tighter than they are now.”