Employment and Its Impact on CRE Fundamentals


Employment data is perhaps the most important economic metric that impacts the underlying fundamentals of the commercial real estate market. People who have jobs create demand for housing, purchase more goods and services than those that don’t, and fill office, retail and industrial space. From just about any perspective, a 5 percent unemployment rate should be viewed as highly positive. But while it is certainly better than it has been in other years, this rate doesn’t really tell the story when it comes to the health of the job market.

Those who follow the jobs market closely know that the unemployment rate hides many of the negative truths about employment in the U.S. Several decades ago, the formula for calculating this rate was changed to eliminate counting folks who are working part-time, who would rather be working full-time, from the unemployed rolls. Today, the Department of Labor estimates that there are about 6 million Americans in this position. When this change was implemented, folks who became so disillusioned with their prospects of getting a job that they stopped looking for work for more than 30 days were eliminated from the count of the unemployed as well.

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If these two groups of Americans were included, the “underemployed rate” would swell to 11 to 12 percent by many estimates.

For these reasons, the actual number of jobs created is a much better indicator of the health of the labor market rather than the unemployment rate. In October, there were 271,000 jobs created, according to DOL, well ahead of the 181,000 consensus estimate. This brings the average to about 230,000 per month over the past 12 months. Additionally, since the recovery began in the beginning of 2010, about 13.5 million jobs have been created. During the recession, we lost about 8.5 million jobs, so we have regained about 5 million jobs more than we had in the cyclical peak year of 2007.

So with an unemployment rate of 5 percent and an average of 230,000 monthly jobs created over the past year and 5 million more jobs than we had at the peak of the last cycle, things must be good, right?

If we peel the onion a bit more other realities become clear. While the monthly average over the past 12 months has been 230,000 jobs, over the past three months the average has been 187,000. Furthermore, the October report is generally overstated each year, as it is the month when DOL uses its birth/death rate model where it makes wild assumptions about how many new companies may have been formed (and how many may have closed) and how many jobs were created at these imagined companies. Historically, the October numbers have been revised downward sharply.

If we look at the participation rate, which measures how many Americans of working age are actually working, we see it stands at 62.4 percent, a decades-long low. Additionally, while we presently have 5 million more folks working than in 2007, if we look at population growth since then and our current participation rate, we remain about 4 million jobs short of attaining the same relative level of “full employment” that we had in 2007. This is because even at 230,000 jobs created per month, we are well short of the monthly averages observed in other recoveries. Layer on top of this the fact that real wages have not increased all that much and the nationwide employment picture is not as healthy as the unemployment rate would indicate.

On a local level however, things are booming. This recovery has produced more local jobs in a shorter period of time than in any of our recent recoveries and we presently have more people working in New York City than ever before. Local employment peaked in 1970 at about 3,825,000 jobs. This dipped to about 3,150,000 in 1977. In the economic expansion between 1977 and 1989, the city saw 463,500 jobs created over a 12.5-year period. After the Savings & Loan crisis in the early 1990s, 489,500 jobs were created over an 8.75-year expansion. During the present recovery, 533,700 jobs have been created (a higher total than in the past) and they occurred in just 5 3/4 years (a much shorter period of time). City employment is approaching 4.2 million jobs, a new high.

Interestingly, the financial sector’s peak employment was in 2000 at about 493,000 jobs. Today, financial services stands at about 460,000 jobs. The city’s employment base is becoming less dependent upon any one industry. For instance, the TAMI sector is at an all-time high, employing about 340,000 people today.

Millennials are having a significant impact on local employment as well. They now make up the largest component of the labor force at 53.1 million. This compares favorably to the 49.5 million Generation Xers and 49.3 million baby boomers. Millennials prefer city living and NYC has been a beneficiary of this trend.

To the extent that the city remains safe and the quality of life issues that seem to be deteriorating get addressed, the future of the city looks very bright from a population and job creation perspective. This should have a positive impact on our commercial real estate fundamentals as these new residents and workers live, work and shop in the greatest city in the world.