Last Friday, the jobs report was released, announcing that 165,000 new jobs were created in April. Some market observers felt this report was very positive, while others felt it was just mediocre.
However, the number was better than expected, and markets reacted.
The stock market rallied on this news, and the VIX index—which since its introduction in 1993 has been considered by many the world’s premier barometer of equity investor sentiment and market volatility as measured by stock index option price fluctuations—hit levels not seen since early 2007, when the credit crisis and the Great Recession were not even on the distant horizon. Are these sentiments appropriate, and what is their impact on commercial real estate?
Notwithstanding the recent jobs report, we must look at total jobs as the key metric for commercial real estate. No other statistic more profoundly impacts the underlying fundamentals of real estate than employment. Folks who have jobs fill office space and industrial space. They form new households needing to lease rental apartments or purchase homes. They shop in retail stores and stimulate the economy. Therefore, we should be looking at the actual number of jobs relative to the previous peak, as this tells us something about where our occupancy rates should be.
Thus far, we have regained about five million of the 8.6 million jobs lost during the Great Recession. We still need about 3.6 million jobs to get back to where we were. However, the U.S. population has grown by about 16 million since then, meaning we are actually about 14 million jobs short of where we need to be as a nation to feel as good as we felt prior to the recession.
These are big numbers, and we need economic growth—i.e., GDP growth—to get us back to long-term trend numbers that will allow us to recapture these jobs. The government’s reaction has been to print money to try to help the economy grow. However, even with the trillions printed, the economy is limping along, and the money that has been printed is not having the desired effect. The government’s answer: keep printing. This is scaring the heck out of many market watchers, as we have never experienced anything like this before. No one ever thought that so much liquidity could have been injected into the market without runaway inflation.
In order to get employment stimulated, the Fed should stop paying interest on the almost $2 trillion of excess bank reserves, which will encourage banks to lend to businesses, which will in turn go out and hire people. We also need to instill confidence in the business community so that businesses are willing to take risks, borrow the money that banks will be incentivized to lend and hire folks. How can the government do this? By coming up with budgets that show they understand that we cannot simply keep printing money (i.e., incurring debt on top of debt on top of debt) and expect that someday everything will be okay without actually addressing the problems we face.
We need some real leadership in Washington. If Democrats say that they won’t address entitlements and Republicans say they won’t address tax increases, there is no long-term solution, something most Americans know. Any attempt to attain budget sanity must acknowledge that entitlements must be tangibly reformed, as it is impossible to get there without it. On the revenue side, taxes need to be raised on everyone, not just the “rich.” In the 1980s, 16 percent of Americans paid an effective income tax rate of zero. Today, the percentage is about 50.
Getting compromise on these issues will be politically difficult but necessary. This is where leadership comes in. We need to see some guts in D.C. If we get some, we may actually instill some confidence in job creators, see healthy GDP growth, see jobs created and see conditions under which commercial real estate’s underlying fundamentals tangibly improve. If this happens, optimism will be well placed. Without it, we may all just be fooling ourselves.
rknakal@masseyknakal.com
Robert Knakal is the chairman and founding partner of Massey Knakal Realty Services; in his career he has brokered the sale of more than 1,300 properties, with a market value in excess of $9 billion.
