How Will Labor Market and Job Creation Rate Influence Commercial Real Estate Projections?

Despite widespread job openings now totaling well in excess of 6 million, a lack of skilled labor possessing the qualifications needed to fulfill the responsibilities required of those openings is likely to have a far-reaching impact on the health of the labor market as well as job creation — not to mention the potential effect on the commercial real estate sector’s outlook.

With unemployment reaching its lowest percentage (4.3 percent) in more than 16 years, along with more than 80 consecutive months of positive economic gains — and an economy close to, if not already at, full employment — it is clear that the outlook for the commercial real estate sector will continue to be linked to the overall economic growth rate as well as the rate of job creation.

The positive economic indicators have inspired a greater level of confidence from members of the workforce, including those previously wary — whether warranted or not — of the potential for a sudden backslide into economic instability. Since this newfound confidence is especially apparent among the demographic of young workers still likely to be living at home with their parents, the sustained strength of the labor market is expected to have a positive influence on apartment absorption.

Due to a strong sense of confidence and stability in the economy, the youngest generation of workers is increasingly looking to rent an apartment for the first time. Although the workforce is showing indications pointing to greater levels of confidence in the strength and stability of economy, the lack of skilled workers has still had a limiting effect on new job creation.

Even though job creation numbers may be experiencing the adverse effects of a tight labor market, there is reason to believe that, despite the adverse impact, the commercial real estate market will benefit nonetheless. This optimism can be attributed to the fact that despite a substantial shortage of skilled workers to fill open positions, demand for commercial real estate currently exceeds the pace of construction.

Of course, it is fair to wonder why commercial real estate demand is still on the rise in the midst of a labor shortage in which 6 million open positions remain unfilled. This is because certain companies, including those in the professional, business, and financial services employment sectors, have adopted a recruiting strategy revolving around recent graduates for positions requiring the use of office space. Even in an economy currently enduring a significant labor shortage, the jobs created by these companies alone have spurred increases in demand for commercial office space.

It’s worth noting that the economy has not entirely avoided the drawbacks that typically accompany a labor shortage of 6 million or more, as top-line growth has undoubtedly been limited by the inability of American businesses to fill open positions with skilled workers. As it stands now, however, the labor shortage might not necessarily hinder the current rate of economic momentum. After all, the income gains associated with a 4.3 percent unemployment rate and an 8.4 percent underemployment rate — which is the lowest in the past decade — should continue to have a positive impact on economic consumption for the foreseeable future.

Strong Job Creation Numbers Inspiring Young Workers to Enter Housing Market for First Time

For an entire generation of young people, growing up during a time of economic uncertainty has had an undeniable impact on way they approach all manner of financial decisions. Members of this generation have exercised great caution while adopting a risk-averse financial philosophy, and this philosophy has in turn limited their willingness to consider entering the housing market for the first time.

The limited interest among members of this youthful demographic has had a measurable effect on the real estate industry, but it appears that the strength of current economic conditions might finally be enough to convince these young people to test the housing market. It appears that the recent reports of strong job creation numbers — along with a wealth of job openings representing a record high — have inspired a sense of confidence among the group of people least likely to act hastily based on a report of the most recently available economic statistics.

Of course, this does not mean that this youthful generation has not faced difficulties upon entering the housing market for the first time, particularly since the inventory of single-family homes available for purchase is currently at an all-time low. Combined with the fact that apartment vacancies presently stand at just under four percent (3.8 percent, to be precise), it is clear that the sudden increase in demand cannot be met given the currently available supply even when one considers that 371,000 new units are expected for delivery in the next 12 months — not to mention the fact that new apartment construction has never been higher in the past 30 years.

It is not only the residential real estate market that is experiencing the influence of the continued return of strong economic indicators, as the commercial real estate market is also dealing with a level of demand that cannot be met by the current pace of new commercial real estate construction.

This is especially true as it relates to financial services employment as well as professional and business services employment, all of which have outperformed the labor market as a whole. Since companies within these fast-growing categories have primarily targeted recent college graduates for recruitment to new, office-based positions, the demand for new commercial real estate has increased at a rapid rate greatly exceeding the current pace of commercial sector construction.

With the expectation that 2 million new jobs will be added by the close of 2017, there is some concern that a large percentage of these positions will nonetheless go unfilled due to a shortage of skilled workers available for what is now a total of 6 million job openings currently available in the United States. Keeping these and other economic figures in mind, the Fed has continued to favor a moderate monetary policy in an economy lacking any sign that it may be prone to overheating.

Declining Trade Deficit Indicates Potential for Substantial Gains in GDP Growth

Just a single month after an increase in the US trade deficit inspired at least some degree of pause among economists, the $4-billion decline in the trade gap measuring goods has offered ample reason for economic optimism as well as the likelihood of continued GDP growth. While the January numbers indicated a trade deficit totaling $68.8 billion, data from the month of February indicated the trade gap closed to just $64.8 billion, leading some economic analyses to alter GDP growth prognostications by as much as half of a percentage point.

It is necessary to point out, however, that data taken from the opening months of any new year are subject to substantial variances because of a number of factors that remain somewhat fluid — yet not entirely unpredictable — on a year-to-year basis. The Chinese lunar new year, for example, has a significant influence on the national trade deficit of the US, as the overwhelming majority of China’s businesses shut down for the duration of the holiday. With China, more so than any other country, the US holds its greatest trade deficit, which is why the annual holiday wields so much influence over early year trade deficit metrics.

Even after accounting for the influence of the Chinese lunar new year, the decline in the US trade deficit supports the notion held by many economists regarding the potential for continued economic growth going forward. In fact, the likelihood of continued GDP growth is further bolstered by increases in inventory production, including both retail and wholesale inventories. In the case of both retail and wholesale inventories, the February data shows an increase of 0.4 percent.

With the closing of the trade deficit gap of $4 billion from January to February, along with significant data demonstrating a 0.4 percent increase in inventory production across retail and wholesale inventories, it seems clear that the economy is poised for a period of sustained growth in GDP, even in the face of the recently released data indicating a first-quarter slowdown for the 2017 year.

As most economists — not to mention the officials at the Federal Reserve — have concluded, the first-quarter slowdown in GDP growth does not appear indicative of an emerging economic trend. Instead, a closer look at the data reveals the existence of the necessary preconditions supporting the onset of a sustained period of stable economic growth. Given the fact that service-related trade patterns tend to remain stable and relatively predictive on a month-to-month basis, the $4-billion decline in the trade deficit pertaining only to goods offers ample support for an optimistic economic view for the foreseeable future.

Sharp Upward Trend Continues in Toronto Housing Market

The United States is not the only nation experiencing the return of a booming real estate market: Our neighbors to the north are also in the midst of a similarly extended surge in the marketplace, and it is the renewed strength of the Canadian economy that has powered this upward trend in the average price of existing home sales. Our analyses indicate Toronto is perhaps the most salient example highlighting this continued upward trend, particularly since the city’s average home sale price checked in at $1.2 million in the last month, increasing at a rate representing a 28-year high.

After reviewing each category of housing within Toronto’s city limits — including detached homes, condominiums, and townhouses — it is evident that the sharp increase in the average sale price applies more or less equally to the different types of housing. Even with the 33-percent increase in prices across all housing categories encouraging a 15-percent increase in new listings put on the market, the Toronto housing supply still remains limited by any measure.

Although the sudden increase in equity would lead most economists to predict a continued increase in the number of real estate listings — thereby introducing more balance within the market — our research indicates that many homeowners are still somewhat reluctant to cash in on their gains by putting their home on the market. It is somewhat ironic, but here at Tweed Economics we believe this might be the product of the limited housing supply leaving few good options for potential sellers who wish to remain in the city of Toronto.

City officials are looking at the limited supply of real estate as an issue that may need to be addressed through some sort of government intervention. Throughout our many years working in similar markets in which limited supply issues can be overcome with off-market expertise, intervention by government entities — despite wholly good intentions — all too often leads to unintended consequences that only exacerbate an existing issue or create new, more complex issues.

Various city officials have intimated potential steps they might take to intervene, citing the current lack of affordable housing as a deterrent for first-time homebuyers who wish to live and work in Toronto. This is certainly problematic, and city officials are right to be concerned about a continued lack of supply preventing potential buyers from entering the real estate market. Without first identifying the precipitating factors and understanding how each of these factors influences the market, outside intervention will almost certainly lead to a host of newer and more complicated problems for city officials to handle.

As Toronto city officials discuss the possibility of implementing a vacant-home tax or a foreign-buyers levy in the hopes of reducing real estate speculation, it’s worth pointing out that it is typically ideal to simply allow the market to self-correct. With home values continuing to soar in Toronto, it seems likely that potential sellers in the city will ultimately decide to take advantage of a strong marketplace rather than standing on the sidelines as others reap the rewards of the sharp rise in home equity.

References:

https://www.theglobeandmail.com/real-estate/greater-toronto-area-faces-looming-jump-in-housing-prices-royal-lepage/article33589023

https://www.bloomberg.com/news/articles/2017-04-05/toronto-home-prices-jump-33-in-march-as-market-tightens

 

Trump’s Win Could Spark US Housing Boom, Says Yale Economist

 

Yale economist Robert Shiller believes that Donald Trump’s surprise presidential win could prove a “turning point” that catalyzes a housing boom in the US. The Nobel laureate further argued that the real estate billionaire’s landmark election indicated a shift in American attitudes toward wealth and conspicuous consumption and away from modesty and prudence.

“We used to be more into modest living,” Shiller told CNBC, with regard to the post-Recession years. “Now people are thinking, ‘[that] doesn’t work.’ You know? You have to live big-league and you’re on your way.”

While the data aren’t there to support his cultural observations, Shiller noted that such excitement and attitudes could be seen at Trump rallies and in the stock markets, which rallied following the news of Trump’s win. Indeed, there is an emerging belief that Trump’s administration may usher in preoccupation with big living and materialism, and an aspirational culture reminiscent of the 1980s, according to CNBC.com.

Shiller speculated these attitudinal changes could, in turn, stimulate spending in the housing market: “Trump is a real estate man, right? He talks about living big, living large. I can imagine that this will boost housing demand as well, among at least those who are excited by Trump,” he said to CNBC.

Shiller’s statements came on the same day that the S&P CoreLogic Case-Shiller data came out, revealing that the 20-city property values index had risen 5.1% year-over-year in October 2016, with each of the cities seeing year-on-year gains. The Case-Shiller U.S. National Home Price Index soared by 5.6% during the same month, marking the highest margin of growth since 2014. US home prices have risen steadily due to increasing demand, higher employment, and rising incomes.

“I think we’re at a turning point. The numbers that we’re reporting today are October, before the Trump election, and everything looks different now,” the eponymous Shiller told Bloomberg Television. “There might be a Trump boom coming.”

Shiller also hastened to add that he was merely “wondering” about rather than forecasting a boom, given the uncertainty surrounding Trump’s policy positions.

Trump campaigned successfully on an economic platform of lower taxes, deregulation, and massive investment in infrastructure, all of which spurred palpable excitement among investors. The Dow rose 14.4% in 2016 whereas the S&P grew by 10.8%. That being said, Shiller warned that like Coolidge, Trump may preside over a short-lived era of American prosperity which ends badly. 

References:

https://www.bloomberg.com/news/articles/2016-12-27/trump-win-could-usher-in-boom-for-u-s-housing-says-shiller

http://www.cnbc.com/2016/12/21/americans-want-to-live-big-in-trump-era-nobel-prize-winner-says.html

https://www.bloomberg.com/news/articles/2016-12-27/home-prices-in-20-u-s-cities-increased-5-1-in-october

http://www.newsmax.com/Finance/Economy/robert-shiller-donald-trump-living-large/2016/12/24/id/765471/