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How is the Economy and Job Growth Impacting CRE?

Given that job growth is the principal driver of demand for commercial real estate, how has the employment picture evolved? What other factors might affect our industry’s performance?

  • Over 200,000 jobs were added in each of February through April, boosting optimism for a stronger 2014 than 2013. We forecast that approximately 2.4 million jobs will be created this year compared to the 2.3 million created last year. 
     
  • Overall, job growth has been disappointing in this cycle compared to past economic recoveries. We expect that job growth will continue to be muted relative to previous expansion cycles, but that it will proceed on a slow and steady trend.
     
  • The Fed has been tapering its quantitative easing policy, and is now down to $45 billion per month. For commercial real estate investors, we perceive the tapering decision as a net positive. The Fed’s move sheds light on the improving growth prospects of the U.S. economy, and its steady tapering efforts should remove a portion of the all-too-familiar uncertainty that has plagued business decision-making and capital investment for some time.
Action steps for owners: This forecast suggests gradual improvement in economic growth and employment, though wage growth is likely to trail the rate of job creation. This has implications for owners of multifamily product, emphasizing the need to carefully tailor marketing programs based on the fit of each property for certain wage segments. Developers of office product should assemble sites for the peak delivery period, which varies by market but on balance is likely to be in 2016-2017 as job growth reaches its cyclical apex.
 
Action steps for tenants: Office tenants continue to have leverage in many markets due to modest demand and the effects of densification. However, tenants’ leverage is gradually eroding as economic growth accelerates. The process is likely to take longer than in prior cycles – tenants may have the upper hand in negotiations for 2-3 more years – but office rents are likely to edge higher in many markets over the next few years.
 
Read the full article in the second quarter edition of Transwestern's "Insights + Trends + Opportunities." 
 

 

Alexander (Sandy) Paul serves as executive vice president at Delta Associates, a commercial real estate research firm and affiliate company of Transwestern. Delta Associates produces a number of research reports year-round, which can be found on the firm's website.

 

 

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Translations Blog How is the Economy and Job Growth Impacting CRE?