What Employment Gains Mean for CRE

A look at the "bounce back" in employment and how that affects the real estate industry.

The overall Bureau of Labor Statistics employment report on Friday was positive (a gain of 280,000 jobs), and some real estate-related industry categories did well too. For example, employment in leisure and hospitality increased by 57,000 in May, following little change in the previous two months. The hospitality industry has been doing very well lately, reaching new highs in occupancies and RevPAR, and further increases in employment are likely. Also in May, health care added 47,000 jobs. Within the industry, employment in ambulatory care services (which includes home health care services and outpatient care centers) rose by 28,000—a reflection of the continuing shift in the industry to outpatient care, which requires other kind of real estates than traditional hospitals. Not that hospitals are dying; they added 16,000 jobs over the month. Over the past year, health care overall has added 408,000 jobs.

Retailers are also busy adding jobs, according to the BLS. Employment in retail trade edged up in May (gaining 31,000), and over the last 12 months the industry had added an average of 24,000 jobs per month—a decent clip, but probably more indicative of the drawn-out recovery from the recession rather than much new expansion, at least in terms of retail space usage. Even so, within retail trade, automobile dealers added 8,000 jobs in May, since cars are still selling briskly. Finally, employment in the BLS category “mining” fell for the fifth month in a row, with a loss of 17,000 in May—mostly in support services for the extraction of oil and gas. This kind of employment has decreased by 68,000 thus far this year, after increasing by 41,000 in 2014, a trend that will probably impact a number of local real estate markets such as Houston or Tulsa or the Dakotas.

Does the bounce back in employment numbers mean the Fed is considering higher interest rates more seriously than only a few weeks ago? It’s an important consideration for any industry that borrows money, which is most of them, including every aspect of commercial real estate. Rates have been low a long time now, and there’s an idea afoot that an increase would be more of a jolt than at any other time in the past, simply because the low-interest rate environment seems like a solid normal now. So will rates rise this year? The trouble is, the only definite answer to that question this year is “maybe.”

Referring to the positive employment numbers, as well as the possibility that inflation will hit the Fed’s target of 2 percent this year, New York Fed President William C. Dudley said on Friday at the Economic Club of Minnesota’s June Luncheon that “putting this all together, I still think it is likely that conditions will be appropriate to begin monetary policy normalization later this year.” But he didn’t offer a timetable, except to say that further data would be examined as it’s published. Also, he acknowledged the potential bumpiness when of a rate rise (a “lift off”) finally does happen: “Lift-off may not go so smoothly in terms of the impact on financial asset prices. After all, lift-off will represent a regime shift after more than six years at the zero lower bound.”