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Continuing Job Losses Could Batter Fundamentals

The U.S. economy shed 159,000 nonfarm payroll jobs in September, while the unemployment rate remained unchanged at 6.1%, the U.S. Department of Labor reports.

The loss of jobs is a troubling sign for absorption of office space and indicates a weaker economy that will reduce demand for all types of commercial real estate going forward. However, the government’s prompt action to pass a bailout program to buy mortgage-related assets from financial institutions could help mitigate the situation.

Job losses in September are at the highest level since the labor market peaked in December 2007, according to Grubb & Ellis economist Robert Bach, who was surprised by the size of the losses.

“It’s a significant increase above recent trends even before the credit markets freezing in the last two to three weeks,” according to Bach. The government’s employment study was conducted in early September and does not include the impact from the recent turmoil in the financial services sector.

Hessam Nadji, Marcus & Millichap’s managing director for research services, agrees with Bach and says that the September job losses are larger than expected. The latest job losses are also larger than the trends so far in this downturn, which will impact commercial real estate occupancies negatively.

“The recent turmoil in inter-banking lending and commercial paper market have exacerbated the downturn that was in progress before the latest phase of the financial crisis. Many companies are cutting more people than expected in reaction to the increased uncertainties and inability to get financing, particularly short-term debt,” according to Nadji.

Grubb & Ellis has been forecasting negative office absorption of about 25 million sq. ft. over the next five to six quarters. Bach anticipates that the unemployment rate will peak above 7% toward the end of next year.

The economist expects that financial sector job losses will impact banking centers such as New York and Charlotte, N.C. As well, the recent banking sector mergers involving Wachovia, Washington Mutual and Merrill Lynch will impact other markets where there is overlap between the merged banks and their acquirers.

Rajeev Dhawan, director of the economic forecasting center at Georgia State University’s J. Mack Robinson College of Business in Atlanta, expects that the loss of financial services jobs in the New York metro area will lead to a negative multiplier in the area.

For instance, a Wall Street employee losing a job will cut back on consumption and the resulting decline in demand for goods and services will negatively impact the wider economy and lead to more job losses. Dhawan sees the latest loss of jobs as a clear indication that the U.S. economy is in recession, which is bad news for the commercial real estate sector.

The September job loss figures reveal that retailers cut 40,000 jobs, while construction companies shed 35,000 jobs. Business services lost 27,000 jobs, while the financial services sector shed 17,000 jobs.

“Every sector seems to be losing jobs,” Dhawan notes. “Most corporations going forward would just like to hunker down and not expand, which is bad news for properties that are just finishing and coming on the market.”

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