Strong job creation drives demand for commercial real estate

charlotte-ljones-188983.jpgFor better or worse, the commercial real estate industry is fundamentally tied to the strength of the U.S. economy. In June the labor market created more jobs than expected, and while wage growth lagged, those new jobs will drive demand across the industry.

All sectors stand to benefit from increased job creation, but the office sector could gain the most — those new hires need somewhere to work, after all. At the same time, the multifamily market is heating up. That’s good news for owners but bad news for tenants, many of whom are struggling in tight markets plagued by a lack of affordable housing.

The labor market fuels job creation, wage growth lags

The economy added 222,000 new jobs in June, according to the Bureau of Labor Statistics. That puts the labor market on pace to create around 2 million new jobs this year. Professional service jobs experienced a strong share of those gains, and the health care sector, social assistance services and food service sector also enjoyed significant growth.

While job growth accelerated, the unemployment rate increased slightly to 4.4% as more people returned from the sidelines to look for work. At the same time, businesses are struggling to fill open positions, and job openings at the national level are at a record high of 6 million. That’s an unusual dynamic, considering many Americans have not fully benefited and recovered from the Great Recession, yet employers are having trouble filling positions. To understand the disconnect, experts largely blame weak wage growth.

“This is not a market we have typically seen,” Manpower Senior Vice President Michael Stull told the New York Times. “We have not before seen unemployment drop, low participation rates and wages not move. That tells you something’s not right in the labor market.”

Wages advanced a mere 2.5% in June, barely outpacing core inflation’s 1.7% growth over the period. The Federal Reserve acknowledged this dynamic in its updated report on the economy, and suggested weak productivity growth over the last several years could explain lackluster wage growth. Despite the tension between wage growth and job growth, the economy added a significant number of jobs in June, and that is going to impact commercial real estate.

More jobs is good news for the office sector

June’s job growth is expected to drive demand for office properties. That is according to a recent report from Marcus & Millichap, which said today’s growing labor market is fueling demand for commercial real estate. That’s especially true for the office sector, considering professional jobs, including those in business and financial services, have grown quicker than the overall labor market. Job growth has helped boost absorption over the last 12 months, and that success is expected to continue throughout the course of 2017.

Further benefiting the office sector, the report said today’s tight jobs market is pushing  companies to recruit more recent college graduates. This directly boosts demand for office space and comes at a time when developers are building less office space nationally than they have in recent years. This year, developers are expected to deliver 81 million square feet of office space, far below the 117 million square feet averaged during the 2000s. The combination of slowing office construction and a growing jobs market suggests vacancies will keep falling while rents continue to climb.

Multifamily is poised to tighten further

The Marcus & Millichap report also highlighted how the June jobs figures could impact the multifamily sector. Increased job creation and record high job openings are giving young workers more confidence to move out on their own, but since the single-family housing inventory is near its all-time low, experts said many renters will decide to stay in apartments. Average multifamily vacancy levels hover around 3.8%, and the strong labor market promises to further tighten multifamily markets as more people move to urban centers to pursue their careers.

This increased demand will heat up an already tight sector and pressure rents to rise further. That is good news for multifamily developers, who will likely watch profits grow and demand intensify in their markets. It’s not such good news for tenants, who are largely experiencing weak wage growth and growing rents. That dynamic could intensify the affordable housing crisis, which is reaching new heights according to a recent National Low Income Housing Coalition report, which said that nobody working full-time at the federal minimum wage can afford a two-bedroom apartment at market price anywhere in the country.

June’s run of job creation is good news for the economy, and both the office and multifamily sectors stand to benefit. Wage growth is uncharacteristically failing to keep up with job growth, and employers around the country are struggling to fill vacant positions. While that dynamic has yet to unfold, the commercial real estate industry is in good shape as job growth boosts demand and tightens markets.

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Topics: Industry News