Improved Hiring Trends?
Parsing the range of recently updated indicators, the most warmly received data relates to the labor market. Given the abysmal performance of the labor market since the recession’s official end in June 2009, signs of improvement demand celebration akin to the return of the Prodigal Son.
The headline measures of employment remain among the most serious causes for concern; as of November, net employment had increased by just 1.6 million jobs over the previous year. Month-to-month improvements in the second half of the year have shown no improvement on the first half.
The positive trends in the labor market data are found elsewhere, in unemployment claims, termination rates and job openings. Initial claims for unemployment insurance fell to their lowest levels in three years in December. Even though net hiring remains weak, job openings have been rising steadily from the historic lows recorded in 2009.
If these parallel developments foreshadow an increased pace of hiring, a prerequisite for a more robust recovery may be falling into place. Many firms now boast margins that can support an increase in hiring but are reserved in their projections for demand. Thus far, firms have shown little appetite for proactive expansions of capacity. Given cutbacks in several areas, including government and some segments of financial services and retail employment, other firms will have to accelerate hiring if the overall trend is to improve.
Implications for Investment
Amid this protracted period of shifting sentiment and data, commercial real estate capital inflows have outpaced trends in the real economy as well as in property fundamentals. From a local peak in the second quarter, the pace of transaction volume slowed in the third and fourth quarters but remains well ahead of prior-year levels. Core asset investment trends remain decidedly positive, with property sales in cardinal markets commanding higher valuations and exceptionally low-cost financing.
Many investors have pointed to core real estate’s haven status as a rationale for its strong investment performance. Even as the employment drivers of space demand have lagged, domestic and cross-border investors and lenders have poured capital into the most liquid assets. On account of its stronger fundamentals and the contribution of agency financing, the apartment sector has recovered across a broader geographic and asset range.
If the economy shows real signs of improvement, the appeal of safe havens will necessarily diminish. On one hand, this implies that spillovers from core investment and credit availability might accelerate. That would be a welcome trend, since prices of noncore assets have trailed the core market significantly. On the other hand, diminishing risk aversion presents a new set of challenges for the commercial real estate market, in particular as relates to the cost of financing and because of improving risk-adjusted yields for other, non-real estate assets.
dsc@chandan.com
Sam Chandan, Ph.D., is president and chief economist of Chandan Economics and an adjunct professor at the Wharton School.
