Job Losses Lead to Rising Vacancies in U.S. Property Sectors

Suzanne Mulvee, a senior real estate economist with Boston-based Property and Portfolio Research, believes the loss of 51,000 non-farm payroll jobs in July and 463,000 since the start of the year doesn’t bode well for U.S. commercial real estate.

“It confirms that we’re in a recession. We’ve already seen the impact of slower job growth, rising unemployment on demand for real estate. And vacancies across the four core property types that we track, as well as for the markets we track, are rising,” Mulvee notes.

The government reports that the U.S. unemployment rate rose to 5.7% in July, from 5.5% in June. In the last year, the unemployment rate has risen 1%. What’s more, the number of Americans filing first-time claims for unemployment benefits rose last week to the highest level in six years. Initial jobless claims rose by 7,000 to 455,000 in the week ended Aug. 2, up from 448,000 the prior week. Meanwhile, the number of continuing claims increased to a four-year high.

Putting it all together, PPR expects it’s going to a bumpy ride for commercial real estate the remainder of the year. “We will see [property] value losses, we will see lower rents than buyers at the peak had expected. That could lead to a bit of distress on the fringes in the market,” Mulvee says.

The national retail vacancy rate, which started climbing earlier than in other property sectors, is currently pegged at 11.8%. PPR’s forecast is for this figure to rise to 14% by late 2009. That’s up from a vacancy rate of less than 10% in 2006.

The retail sector, one of the commercial property sectors that has been feeling the impact of a consumer cutback, has lost more than 211,000 jobs since employment peaked in the sector in March 2007. In July alone, the sector lost more than 15,000 jobs.

There have been more than 5,000 store closings, or announced closings, year-to-date in the sector, PPR reports. This is the highest number of closings since 2004. In addition, the retail sector is feeling the impact of consumer distress.

“Unfortunately, it is going to get a little worse before it gets better. As far as the fundamentals go, demand is very weak today and it is going to remain weak until the end
of this year for sure,” according to Mulvee.

She doesn’t expect a strong bounceback for the sector until 2011, even though the sector will start to rebound gradually starting in 2009. “The housing market is obviously the biggest issue. There is the tax that consumers are facing with higher energy costs and higher food prices.”

In the office sector, the vacancy rate nationally is 15.6% at mid-year, up from a bottom of 14.7% in the third quarter of 2007. PPR expects this figure will peak at close to 17% by late 2009. This forecast is based on 54 of the largest U.S. metros tracked by the firm.

And PPR sees vacancy for industrial properties topping out at more than 10% by the end of the year, up from the current 9.4%.

The government jobs report points to a loss of 22,000 construction jobs in July, and the sector has lost 557,000 jobs since it peaked in September 2006. The good news for commercial real estate is that the losses are mostly contained on the residential side.

Kenneth Simonson, chief economist for the Associated General Contractors of America, Washington, D.C., notes a 27% decline in residential construction spending since June 2007. But workers that are still officially on the payrolls of residential contractors are now being sent to nonresidential sites such as schools, hospitals, hotels, and office buildings.

If those figures are factored into the commercial construction side, it would actually result in a gain of 367,000 jobs during the last year, rather than the reported loss of 58,000 jobs on the non-residential construction side.

Construction spending in the public, non-residential sector is up more than 5% since June 2007, and 7% for the first half of 2008, according to Simonson. He expects spending to soften as the year progresses, however.

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