What Will the Fed Make of the Softening Job Market?

​The softening job market is affecting the Federal Reserve’s decision making which is affecting interest rates and therefore commercial real estate activity.

That’s the synopsis from John Chang, senior vice president of research services, Marcus & Millichap in the firm’s latest video discussing industry trends.

For about six months, Chang has said that a recession is highly unlikely without a significant rise in the unemployment rate.

The rate today is hovering near the 50-year low of 3.5% for the past year or so. Typically, recessions result in a 50bps​ spike.

“It will be tough to get the unemployment rate to rise over 4% unless we have a labor shortage,” Chang said, “which we don’t have now, given the high volume of job listings.”

But “cracks are forming, though,” he said. “The JOLTS jobs report in February showed that for the first time since May 2021, the total number of openings fell below 10 million.”

(The JOLTS Report measures the number of job listings and the number of people who are looking for work.)

Smaller companies are listing a fewer percentage of openings. Small to mid-sized companies (250 to 999 employees) are struggling the most, Chang said.

He pointed out that the Fed wants to bring down wage inflation, which has been climbing more than most, at a rate of roughly 4.5%.

“Rising wage costs roll into all other expenses and thus exacerbate already rising inflation,” he said. “We first need to burn off the job openings. Will a shrinkage in job openings be enough for the Fed, leading to their next decision on May 3?

“If it is, then the Fed will potentially hold off on their rising-rate schedule strategy,” Chang said, mentioning that the next JOLTS report will be issued on May 2.

Change said that if the Fed raises by 25bps on May 3, the chances are that will push interest rates higher and CRE lending will be further constrained and that will weigh on transaction activity.

If the Fed keeps the rate flat, lenders will be able to stabilize their offerings, and the CRE price discovery process will begin and revive transaction activity.

In the meantime, Chang said, many investors are waiting for stability and clarity while private capital investors are active, “looking for high-quality assets that will stand the test time.”