Strong Job Creation Boosting Real Estate Outlook

The economy added 266,000 positions in November, the largest monthly gain since January. Analysts suggest this strong job growth could prolong the real estate cycle.

Marcus & Millichap, Calabasas, Calif., said November hiring “surged” because the General Motors-United Auto Workers Union strike ended, returning 41,000 auto workers to payrolls. “However, even omitting these positions, an above-average 225,000 personnel were still added,” the firm’s Research Brief said.

November’s “robust” hiring pushed the unemployment rate down 10 basis points to 3.5 percent, a 50-year low, Marcus & Millichap reported. Job creation has averaged a healthy 180,000 new jobs every month this year, the report said.

This low unemployment is brightening the real estate outlook, Marcus & Millichap said. Unemployment has remained at or under 4 percent for 21 consecutive months, which leads to accelerated household formation and greater wage growth. This added housing demand has pushed the national apartment vacancy rate down to 3.7 percent, a nearly 20-year low. And with more households earning higher incomes, retail spending is up 4.4 percent this year, underscoring demand for retail centers, the report noted.

“The pace of job creation will ease going forward as the labor market nears full capacity,” Marcus & Millichap said. “Because there are more open positions than people available for hire, employers are implementing new recruiting strategies including adding jobs in secondary and tertiary markets to tap underutilized labor pools. This trend has helped tighten office and apartment vacancies in these metros.”

Construction in smaller cities remains limited, so investors targeting secondary and tertiary markets should benefit from space demand created by this staffing shift, Marcus & Millichap said.

“For years, economists have said that the cycle has been long in the tooth and that a market correction would soon come to pass,” RERC, Houston, said in its most recent monthly real estate report, Global Realities. “But looking at the current evidence, it doesn’t look like much will change over the next 12 months, at least in the U.S.”

RERC said global realities including negative interest rates elsewhere in the world are benefiting U.S. capital markets. “Compared to other developed countries, the U.S. is and will continue to be a safe haven,” Global Realities said.

Because commercial real estate assets have predictable cash flow, they are in high demand, RERC said. “With interest rates heading downward, there may still be room for commercial real estate price growth over the next year despite the current ultra-low cap rates,” the report said. “As long as capital remains disciplined, fears of a commercial real estate asset bubble are unwarranted.”