U.S. Labor Market, CRE Still on Track for Fed Soft Landing

Assessing the overall health of the economy and its impact on the commercial real estate sector is all about perspective for John Chang, senior VP of research services at Marcus & Millichap. In a recent market update from the firm, Chang argued that although unemployment is up while job growth is down, and the overall level of unemployment is showing flashing signs of an impending recession, this month’s Fed meeting should bring some respite to the consumer sector, and in turn, keep the commercial real estate sector relatively untouched.

“Even though the employment market is softening, we have to remember that it is moving from an overheating state to a more normal state.” He said. “This is on target with the Fed’s plan to control inflation by slowing the economy. By cutting rates in September, and possibly again in November and December, the Fed can level off the employment market and mitigate the risk of a recession.”

The senior VP contends that the overall health of the economy, and its true impact on commercial real estate, can only be assessed when taking a long-term picture. Specifically, Chang argues that while the most recent unemployment rate of 4.2% is high for the last four years, unemployment remains below the 20-year average rate of 5.8%.

The jobless rate has been trending upward for the last 15 months, he said, and that has been by design. The labor market was overheating for all of 2022 and much of 2023 because the levels were generally in the mid-3% range or basically at a 50-year low, Chang said. That was driving wage growth by about 5.4%.

Wage growth is now between 3% and 4%, and the economy is still on track to add two million jobs this year, and that should be positive for retail and industrial real estate.  

Chang said that if the Fed can orchestrate a soft landing by lowering interest rates in the last two quarters of the year, that could mean good news for demand for apartments and self-storage as this could lead to gains for consumers. 

“For now, we have officially added 2.9 million jobs between April 2023 and March 2024.” He said. “But when [preliminary revisions from the Bureau of Labor Statistics] are enacted in five months, the official job creation will be reduced to about 2.1 million jobs.”

“That is about on par with the number of jobs created each year between 2011 and 2019.”  

Chang said that the unemployment rate statistic is being driven by high unemployment among people ages 20 to 24 years old and that the rate for people older than 25 years old remains below the 20-year average. For individuals between 25 and 55 years old, the figure is 3.6% despite the labor force participation rate for that demographic, 84%, being above the 20-year average.

Chang said that the outlook for investors remains positive – barring any geopolitical or economic disruption.