Employment Market Shows Signs of Softening

The pace of hiring slowed in October, in the latest sign of economic softening as the Federal Reserve continues to hike the federal funds rate.

The labor pool grew last month as well, however, and the pace of hiring ultimately translated into a 20 basis point increase in the unemployment rate to 3.7 percent. And “while still over 100 basis points below the average of the past two decades, last month’s slight increase in joblessness may nevertheless be a first step toward a softer labor market,” Marcus & Millichap analysts say in new research. “This is the intended outcome for the Federal Reserve, which hopes to temper wage growth, and by extension inflation, by raising companies’ capital costs via higher interest rates.”

Employment growth averaged 457,000 jobs per month in the first seven months of 2022 but moderated to 289,000 in July. Around 261,000 jobs were added in October, according to BLS numbers.

“Notable October onboarding occurred in professional and technical services, manufacturing and accommodation. The most staff additions were in the health care and social assistance sector, now surpassing the pre-pandemic high,” the Marcus & Millichap analysis notes. “As more industries pass this threshold, job growth is expected to slow overall, even as labor demand for certain professions stays high.”

So what does that mean for CRE? For starters, demand for industrial property is likely to remain high as the manufacturing sector continues to add more jobs on average each month of this year versus the same period in 2021 and reshoring remains a viable trend going forward. Transportation and warehousing employment figures remained promising in October, and overall demand for space held strong last month. The national vacancy rate has remained below 4 percent for the last year. But “while the manufacturing outlook is bright, warehouse and distribution demand is set to taper as retailers shed excess inventory and consumer sentiment cools,” the firm’s analysts say.

In addition,  a “potent” drop in multifamily construction deliveries is expected in 2024 as rising capital costs constrain development.