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July Jobs Report: A Temporary Setback for Commercial Real Estate?

The disappointing July employment report released last Friday by the Bureau of Labor Statistics contains one number that is telling. The loss of 6,000 jobs in temporary help services from the prior month points to a lack of pent-up demand for full-time workers, says Robert Bach, chief economist for Chicago-based brokerage Grubb & Ellis. “For commercial real estate, it points to a slower leasing market and continued strength in investor demand for core assets.”

Indeed, low interest rates and mediocre returns for other asset classes have attracted investment capital to well-stabilized, high-quality commercial properties in the top markets. That in turn has driven down capitalization rates for properties fitting this profile and generated multiple bids, according to Bach.

Private sector employers added 71,000 workers to their payrolls in July, but a loss of 202,000 government jobs resulted in a total loss of 131,000 nonfarm payrolls. The national unemployment rate remained steady at 9.5 percent. Economists had expected the private sector to add 90,000 workers in July, and for the drop in nonfarm payrolls to be about 60,000. Thus, the report fell short of expectations.

The losses in government employment were comprised of 154,000 at the federal level, including the elimination of 143,000 temporary census jobs, 10,000 state government jobs, and 38,000 at the local level. Struggling with plunging tax receipts and restricted from running deficits, state and local governmental units laid off workers to balance their budgets.

Commercial real estate economists see the glass as half full, not half empty, based on their analysis of the latest jobs data. “The continued modest gains in private sector hiring reinforce the idea that the worst is over for the commercial real estate industry,” says Hessam Nadji, managing director of research services for Marcus & Millichap Real Estate Investment Services based in Encino, Calif.

“While [economic] growth has been tepid thus far, and meaningful job gains have yet to materialize, vacancy rates for each property type will likely peak this year as we have been predicting since early 2009,” explains Nadji.

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