What The Latest Jobs Numbers Mean For CRE

The employment market has been the topic on everyone’s lips as of late, as the Federal Reserve continues explicitly calling for it to cool to help tamp down inflation. But one industry watcher says job creation has been good for CRE demand — and that investors should continue to consider the long-term perspective, even if the jobs market pulls back modestly.

“Media coverage of jobs has been upside-down,” says Marcus & Milichap’s John Chang, noting that strong jobs figures are being portrayed as a bad thing because it signals the Fed will likely raise rates again. The US added 261,000 jobs in October, taking the total additions year-to-date to nearly 4.1 million. If the employment market adds just 210,000 more jobs int he last two months of this year, 2022 will rank as the second strongest job growth year on record. 

“I think we need to look at this a bit differently,” Chang says. He adds that job creation is a principal driver of all types of CRE demand, and while 4.7% wage growth is inflationary, it’s just a small fraction of why the Fed’s raising interest rates. And while ”Chairman Powell has repeatedly specifically said the labor market needs to cool….but cooling the market may take awhile,” Chang says.

Parsing the data further, Chang notes that 51 percent of current job openings are in businesses with fewer than 50 employees.  And considering that companies of that size comprise 27.5% of total employment and have historically constituted just 39% of job openings on average, “having more than half of all job openings seems out of alignment,” Chang says.

Two considerations flowing from that could influence CRE demand. First, small businesses have been growing faster than mid-sized companies.  From Q1 2019 to Q1 2022, companies of that size increased headcount by 2.1%, while companies between 50 and 1,000 employees shrunk by 2%. Big companies with more than 1,000 staffers grew the most, by 3.7%.

Also, big companies with more than 1000 employees “are winning the war for talent,” Chang says.  ”So we’re seeing a bit of a barbell effect in the employment market.”

Overall, the labor market is strong — but Chang recognizes that some cracks have emerged, however, as layoffs persist among tech companies as well as mortgage and residential real estate firms hard-hit by rate hikes.  But despite that, “we are still seeing job additions on the unemployment rate is just 3.7%,” he says. “So for now, the employment market is still comparatively strong and that will generally be supportive of CRE and space demand.”