The January employment report from the Labor Department revealed an unexpected decline in the jobless rate from 10.0 to 9.7 percent, but other parts of the report were less hopeful. The Labor Department revised the number of jobs lost over the past year down by 902,000 in its annual benchmark adjustment to unemployment insurance tax records. Since the recession began in December 2007, employers have shed 8.4 million payroll jobs, a decline of 6.1 percent, which would make this the sharpest decline in employment associated with any recession since the Great Depression. Only the extended jobless recovery that followed the 2001 recession lasted longer. Despite the new benchmark, the labor market still appears to be bottoming out, and the question remains how long it will languish at the bottom. Surging labor productivity, strong temporary hiring and an increase in hours worked suggest that employers may soon begin hiring full-time workers. One theory is that employers slashed jobs so deeply when commercial paper markets froze in September 2008 that they will have to start rehiring those workers sooner than they did after the 2001 recession. Grubb & Ellis expects net payroll job growth totaling 500,000 to 1 million by year-end 2010, which, although a step in the right direction, would be just a down payment on the 8.4 million jobs lost since the recession began. Source: U.S. Bureau of Labor Statistics, Grubb & Ellis
Bob Bach is our Senior Vice President, Chief Economist
<!–Noah Shlaes is Managing Director of Grubb & Ellis’ Strategic Consulting Group
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Today’s employment report for January from the Bureau of Labor Statistics revealed a loss of 20,000 payroll jobs last month, a little below analyst expectations. But, paradoxically, the unemployment rate fell from 10.0 to 9.7 percent, also contradicting many analysts who expect unemployment to rise as discouraged workers reenter the labor force before it begins a sustained decline. What’s up with that? Payroll employment and the unemployment rate are derived from two different surveys. The Current Employment Statistics (CES) survey covers 140,000 business and government worksites to derive payroll employment, hours and earnings while the Current Population Survey (CPS) covers 72,000 households to derive unemployment and other characteristics of the labor force. The two surveys don’t always move in lockstep. Many analysts believe the household survey is better at capturing changes in the labor force early in a recovery because it includes the self-employed, which is an important source of employment as laid off workers start up new businesses. Here’s the good news from the household survey: The decline in the unemployment rate from 10.0 to 9.7 percent occurred even as the labor force increased by 111,000. So the decline was not because fewer people were looking for work. The number of employed persons rose by 541,000, and the number of unemployed persons fell by 430,000. The U6 measure of unemployment, which includes persons who have stopped their job search and part-time workers who would prefer to work full time, fell to 16.5 percent from 17.3 percent. The payroll survey brought some hopeful signs as well: The average workweek rose slightly to 33.3 hours from 33.2 hours while temporary hiring surged again by 52,000. This suggests that employers are giving their existing workforce more hours and relying on temps, both leading indicators of permanent hiring. The biggest drag on payroll employment came from a loss of 75,000 construction jobs, but the unusually cold weather across the U.S. last month could have thrown off the seasonal adjustment factor, meaning that the losses were overstated. Expect sporadic months of job creation in the first half of 2010 followed by sustained growth in the second half.
The Institute for Supply Management’s purchasing managers index rose in January to 58.4, its highest level since August 2004. Index values above 50 indicate an expanding manufacturing sector, while values below 50 indicate contraction. The index is a composite of nine other indexes including new orders, production, supplier delivery times, backlogs, inventories, prices, employment, export orders and import orders. The production index increased to 66.2, its highest level since April 2004 while new orders, a leading indicator of production, rose to 65.9. Inventories remained below 50, a sign that production activity will remain strong for the next few months as manufacturers replenish their depleted inventories. A recovery in the manufacturing sector will boost demand for manufacturing properties, and it translates into more goods flowing through corporate supply chains, which will support demand for warehouse/distribution space. Source: Institute for Supply Management, Grubb & Ellis
Bob Bach is our Senior Vice President, Chief Economist
<!–Noah Shlaes is Managing Director of Grubb & Ellis’ Strategic Consulting Group
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Outstanding Commercial & Industrial Loans All Commercial Banks, Seasonally Adjusted
January 25, 2010
The value of commercial and industrial loans, i.e. business loans, on the balance sheets of U.S. commercial banks has declined consistently since late 2008. This seems to corroborate the view that banks aren’t lending. Indeed, a separate survey of banks conducted quarterly by the Federal Reserve reveals that banks have been tightening C&I loan standards or increasing spreads since late 2007. But the survey also reveals that demand for C&I loans has weakened consistently since the middle of 2006. The same trend is evident in commercial real estate loans, with banks reporting tighter standards and declining demand for the past three years. The government debt and excess liquidity in the financial system that has built up since the recession began is like dry tinder. An economic recovery will bring stronger private sector loan demand and issuance, which could begin to compete with public borrowing needs and thereby ignite inflation. Source: Federal Reserve, Grubb & EllisBob Bach
I’ve been on the speaker circuit this month to present my outlook for 2010, and the question I get most often is: Where will the new jobs come from? Many people think the U.S. could be facing an extended jobless recovery, a double-dip recession or, at worst, a “lost decade” similar to what Japan endured in the 1990s. The questioner can’t visualize the next hot growth sector that will jump-start hiring and lead the broader labor market to new heights.
Maybe we don’t want a next big thing. The hot growth sectors of the 1980s (commercial real estate), the 1990s (technology) and the 2000s (finance and housing) turned out to be bubbles, triggering recessions and massive investment losses when they burst. Maybe we want more gradual growth across all sectors fueled by prudent lending standards, and that may be what we are going to get. According to a recent report by Moody’s Economy.com, “By year’s end, all major industry groups will be expanding.” Job growth will be strongest, they say, in environmental services, medical services, biotechnology, restaurants, computer software & services and pharmaceuticals manufacturing. If there is a next big thing, it could be healthcare, but demand will be driven by underlying demographic trends (aging of the boomers), development of new treatments to keep people healthy, and an expansion of coverage to the uninsured, though what that will look like remains uncertain.
The labor market will recover at a gradual pace, and it will take several years to recoup the 8 million-plus jobs lost in 2008 and 2009. But the forecast by Moody’s Economy.com bears repeating: “By year’s end, all major industry groups will be expanding.” It will be a start.
Office and industrial vacancy rates increased every quarter last year, but the rate of increase declined as the year progressed. In the four quarters of 2009, office vacancy increased sequentially by 80, 100, 50 and 30 basis points while industrial vacancy increased by 70, 60, 30 and 20 basis points. Absorption followed a similar trajectory: Totals were negative every quarter last year, but fourth quarter losses were the shallowest.
We are hearing about other signs of a market bottom:
This could be the year of the long-term lease, replacing the one-year extensions prevalent in 2009. Tenants whose leases expired last year shied away from new long-term commitments given the bleak outlook. But the economy has started to grow again, and profits held up remarkably well through the recession thanks to corporate cost-cutting measures including employee layoffs. Tenants are becoming confident enough to lock in the great deals on offer from landlords.
Tenants’ top priority last year was getting the cheapest space, but many tenants are becoming receptive to upgrading their space, i.e. willing to pay a little more for better space. In the retail market, some tenants were shut out of the best locations during the boom. But vacancies have opened up even in the best centers, and retailers are looking at upgrading their locations.
In a few markets, landlord psychology is beginning to shift. The office vacancy rate continues to rise in San Francisco, but some property owners have reduced their concession packages, believing the worst has passed.
Industrial brokers in some locations including Tampa and Columbus are reporting increasing activity by tenants looking to take advantage of very low rental rates.
The average U.S. vacancy rates for the four core property types – office, industrial, retail and apartment – continued to rise in the fourth quarter, but the rate of increase slowed for office and industrial. Vacancy rates last quarter increased by 30 basis points for office and 20 basis points for industrial compared with third-quarter gains of 50 and 30 basis points, respectively. This raises the possibility that the office and industrial leasing markets may bottom out as early as mid-year with modest, positive absorption possible in the second half of 2010. In the office market, a prerequisite for this relatively early bottoming would be for employers to begin adding jobs in the first half of this year, which would also provide support for the apartment and retail markets. For the industrial market, continued improvement in the drivers of demand for industrial space – production activity, freight shipments and global trade – would help the market bottom out around mid-year. Source: Reis, Grubb & Ellis
Bob Bach is our Senior Vice President, Chief Economist
Following a lengthy 13-month liquidation cycle, business inventories grew by 0.4 percent in both October and November. Higher inventory levels among manufacturers and wholesalers in November more than made up for a slight dip in retail inventories. The inventory/sales ratio fell to 1.28, its lowest level since July 2008. With this ratio back to pre-crisis levels, businesses are poised to increase inventories this year, which will translate into higher levels of factory production. This is one reason why the industrial market is likely to be one of the first commercial real estate sectors to begin a recovery.
Another type of inventory – the inventory of office space available for sublease – fell in the fourth quarter, closing out 2009 at just under 120 million square feet. This was the first decline following nine consecutive quarterly increases. Some of this inventory reverted back to the landlord as the leases expired and will show up as direct lease space, but much of the decline came as tenants subleased space at market-clearing prices. Falling sublease inventories typically precede the beginning of a broader market recovery.
Commercial RE Loans at Commercial Banks Percentage of All Bank Loans and Leases, November 2009
Commercial real estate loans accounted for 24 percent of all loans and leases at commercial banks in the U.S. as of November. The Federal Reserve defines these to include “construction, land development, and other land loans, and loans secured by farmland, multifamily (5 or more) residential properties, and non-farm nonresidential properties.” Large domestically chartered banks – the 25 largest in terms of domestic assets – held 17 percent of their loans and leases in commercial real estate while small domestically chartered banks held 41 percent in this category. The preponderance of commercial real estate loans at small banks suggests more failures to come as distressed assets continue to accumulate. Moreover, small banks lend to small businesses, which are job incubators; commercial real estate loan problems at small banks could impinge upon their ability to lend, which could dampen the labor market recovery.
Source: Federal Reserve, Grubb & Ellis
Bob Bach is our Senior Vice President, Chief Economist
The U.S. Bureau of Labor Statistics this morning reported a loss of 85,000 payroll jobs in December, a disappointment compared with the consensus for zero jobs gained or lost. The unemployment rate was unchanged at 10.0 percent. After the announcement, short-term Treasury prices rose a bit (interest rates fell), suggesting a longer period before the Federal Reserve begins to raise interest rates. Oil prices fell, consistent with the scenario for a sluggish recovery. This shouldn’t be viewed as too much of a surprise. November’s gain of 4,000 jobs (revised upward from the previously announced loss of 11,000 jobs) was an abrupt change from the trend, and the labor market gave a little of that back in December. The average monthly job loss receded every quarter last year, from -691,000 in the first quarter to -69,000 in the fourth quarter.
A slower pace of recovery could be better for the long-term health and balance of the economy by keeping a lid on inflation. The Federal Reserve has flooded the financial system with liquidity at the same time that the government has spent heavily to stabilize the economy. The excess liquidity and deficit spending is like dry kindling that could lead to an outbreak of inflation if money begins to circulate faster through the economy, i.e. households and businesses raise their spending quickly. A gradual pace of recovery will reduce the chances for an outbreak of inflation down the road.
ISM Manufacturing Index
The Inventory Story
