U.S. commercial real estate outlook: U.S. labor market hits historic highs, drives continued economic expansion

The U.S. economy experienced a robust first quarter, though it appears to have leveled off, with second-quarter GDP growth coming in at 2.1%.¹

This second-quarter deceleration wasn't unexpected, as it was widely recognized that the first-quarter 3.1% GDP growth drivers were largely transitory. Record job availability, low unemployment, and wage growth, all underpin strong consumer spending—still the engine of the U.S. economy. The U.S. Federal Reserve's (Fed's) rate cut in July provides additional support for continued economic expansion. At the same time, policy uncertainties and a somewhat tepid global growth outlook are acting as a drag on business investment.

Labor markets as strong as ever: The U.S. economy generated a monthly average of 172,000 jobs over the first half of 2019, though this was down from an average of 211,000 during the previous six months. The addition of fewer jobs was primarily connected to a shrinking available workforce, as evident from the tight unemployment rate hitting a 50-year low of 3.6% in April.² With over 7 million positions still unfilled, employers have to compete even harder for workers, mainly by offering higher wages. This accelerating wage growth reached 3.4% in February,³ the highest level seen in the current expansion cycle. The economic alchemy of job gains and higher wages is the key to consumer confidence and the continued increase in consumer spending.

Soft business investment outlook: Policy uncertainties and weak global demand continue to put a dent in business confidence, with investments in business equipment falling to 3.3% for the 12 months through March—the lowest level of the past two years. Investment fundamentals are particularly weak for manufacturing, which has been set back by lackluster global demand and excess production capacity; the manufacturing capacity utilization rate was 75.7% in April, nearly 2.5% below the long-term average.³ On the upside, tax cuts and the overall financial environment remain positives for business investment, and on the whole, we think investment should continue to grow in 2019, albeit more modestly than last year.

U.S. Federal Reserve changing course: Following four rate hikes in 2018, the Fed shifted its monetary policy this year with its July announcement of the first rate cut in ten years. Although most economic indicators point to sustaining the current expansion without additional monetary stimulus, the Fed’s direction will be partially dictated by ongoing lowkey inflation and weak global growth.

Chart of US job openings, 2001 to 2019. The chart shows the number of job openings has maintained an upward trajectory, rising from just over 2 million to more than 7 million between 2009 and 2019.
Chart of wages and employment cost growth, year over year, 2009 to 2019. The char shows average hourly earnings have continued to rise, growing by 3.4% in February - the highest level so far in the current expansion cycle.

Office markets⁴

Demand for office space in the second quarter rebounded to its highest level in the past three years, with total net absorption of 23 million square feet (SF). The quarter-over-quarter increase was in large part due to the year getting a slow start, when heightened economic uncertainty took a toll on leasing activities. Even though supply of new space has trended upward over the last four quarters, it remains below demand. Net completions of 16 million SF fell 8 million SF short of demand, with vacancies dropping by 10 basis points to a record low of 9.6%.

Given historic low unemployment levels and the demographic challenges created by baby boomers reaching retirement age, availability of educated labor will be the key differentiator in office markets for employment and office demand growth going forward.

Rents are continuing to rise, though growth rates have taken a step back of late: Average annual rent growth in the second quarter was just 2.3% compared with 6.0% in 2015. Technology markets take the top positions in rent growth, with Austin, San Jose, and San Francisco showing 6.4%, 6.1%, and 5.9% annual rent growth, respectively.

Historic low vacancies haven't translated into greater construction activities, which remain measured. With total space under construction at 1.8% of available space, it’s at the highest level for the current cycle, but is still substantially below the peak activity of past cycles.

Chart of office supply/demand fundamentals, tracking net absorption, net completions and vacancies, Q1 2018 to Q2 2019. The chart shows that demand for office space in the second quarter rebounded to its highest level in the past three years, with total net absorption of 23 million square feet. Completions stood at 16 million square feet, with vacancies dropping to a record low of 9.6%.
Chart of office rent growth, Q2 2015 to Q2 2019. The chart shows that although rents continued to rise, growth rates slowed in Q2. Average annual rent growth in the quarter was just 2.3%, compared with 6.0% in 2015.
Chart of office space under construction as a percentage of stock, Q2 2015 to Q2 2019. The chart shows that total office space under construction stood at 1.8% of available space in Q2.

Industrial markets⁴

Evolving e-commerce logistics continues to define the industrial market, with demand having outpaced supply over the past nine years and vacancies falling precipitously across the board. The availability of modern logistics space is particularly tight in most major markets, which in part explains the slower leasing activity over the past two quarters. Net absorption of 30 million SF was 27 million SF short of completions, resulting in an average vacancy rate increase by 20 basis points to 5% in Q2 2019.

To meet tightening delivery timelines, e-commerce retailers are storing products closer to consumers. As a result, e-commerce is reconfiguring industrial market demand, increasing the need for space near urban centers that can function as last-mile delivery storage.

As supply increasingly comes to the market, rent growth has begun to stabilize. At 5.5% year-over-year growth, however, industrial continues to outperform other property types by a wide margin. Industrial rent growth is also more pervasive, with even the worst-performing markets experiencing above 3.0% rent growth year over year.

Robust market demand has also had an energizing effect on construction activities, which reached a record high of 295 million SF—equivalent to 1.8% of the total market as of the second quarter. Although greater supply is likely to put pressure on vacancies, given our positive outlook for consumer spending and still-evolving e-commerce logistics, we expect the impact in fact to be minimal.

Chart of industrial market supply and demand fundamentals, Q1 2018 to Q2 2019. Chart shows that net absorption of 30 million square feet was 27 million square feet short of completions, resulting in an average vacancy rate increase of 20 basis points to 5% in Q2.
Chart of industrial rent growth, Q2 2015 to Q2 2019. The chart shows the industrial space stood at 5.5% year-over-year growth in Q2. While growth is stabilizing, industrial continues to outperform other property types by a wide margin.
Chart of industrial space under construction as percentage of stock, Q2 2015 to Q2 2019. Chart shows that construction levels hit a record high of 295 million square feet in Q2, equivalent to 1.8% of the total market.

Multiresidential markets⁴

Multi-residential rental market demand over the past few years has been lifted by an overall shortage of housing options. The supply of multi-residential housing has noticeably ramped up in recent years, but it has been more than offset by weakness in singlefamily housing, which has allowed the overall housing market to remain undersupplied. Demographic trends—the increase in the median age of marriage and in the number of single-person households, as well as tightening homeownership affordability— are also feeding the demand for multi-residential rentals.

The multi-residential market saw a Q2 net addition of 80,000 units—far below demand of 110,000 units. The average vacancy rate contracted by 30 basis points, as a result, to 5.7%, the lowest in the current cycle.

Tightening vacancies have also enabled rent growth, which showed a Q2 2019 average national rise of 3.2%. With the higherend products in urban markets receiving a disproportionate share of supply, rent growth in those areas continues to lag the overall market.

With 670,000 units under construction—equivalent to 4% of the current multi-residential market—supply is likely to stay strong over the next few years. But given the strength of demand fundamentals, we also see occupancies remaining relatively stable.

Chart of multi-residential supply and demand fundamentals, Q1 2018 to Q2 2019. The chart shows that the market saw 80,000 units completed in Q2, well below demand. The average vacancy rate contracted by 30 basis points to 5.7% as a result.
Chart of multi-residential rent growth, Q2 2015 to Q2 2019. Rent growth showed an average rise of 3.2% in Q2 as a result of tightening vacancies.
Chart of multi-residential construction levels as a percentage of stock, Q2 2015 to Q2 2019. The chart shows multi-residential units under construction measured 4% of the current multi-residential market in Q2.

 

 

 

1 Bureau of Economic Analysis, as of July 2019. 2 Bureau of Labor Statistics; based on preliminary job statistics for May and June, as of June 2019. 3 Federal Reserve Bank of New York, Bureau of Economic Analysis, as of June 2019. 4 All market fundamental statistics, including vacancy, absorption, completion, under construction, and rent growth sourced from CoStar, as of Q2 2019. All capital market statistics, including transaction volume, cap rates, and price index sourced from Real Capital Analytics, as of Q2 2019.

Information in this document may be sourced from Real Capital Analytics. ©2019 Real Capital Analytics, Inc. All Rights Reserved.

CoStar disclosure

CoStar Group, Inc. and its affiliates (collectively, “CoStar”) have assumed and relied upon, without independent verification, the accuracy and completeness of such third party information in preparing these materials. The modeling, calculations, forecasts, projections, evaluations, analyses, simulations, or other forward-looking information prepared by CoStar (“CoStar”) and presented herein (the “CoStar Materials”) are based on various assumptions concerning future events and circumstances, all of which are uncertain and subject to change without notice. Actual results and events may differ materially from the projections presented. All CoStar Materials speak only as of the date referenced with respect to such data and may have changed since such date, which changes may be material. You should not construe any of the CoStar Materials as investment, tax, accounting or legal advice.

CoStar does not purport that the CoStar Materials herein are comprehensive, and, while they are believed to be accurate, the CoStar Materials are not guaranteed to be free from error, omission or misstatement. CoStar has no obligation to update any of the CoStar Materials included in this document, Any user of any such CoStar Materials accepts them “AS IS” WITHOUT ANY WARRANTIES WHATSOEVER, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO THE IMPLIED WARRANTIES OF MERCHANTABILITY, NON- INFRINGEMENT, TITLE AND FITNESS FOR ANY PARTICULAR PURPOSE. UNDER NO CIRCUMSTANCES SHALL COSTAR OR ANY OF ITS AFFILIATES, OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES OR AGENTS, BE LIABLE FOR ANY INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES WHATSOEVER ARISING OUT OF THE COSTAR MATERIALS, EVEN IF COSTAR OR ANY OF ITS AFFILIATES HAS BEEN ADVISED AS TO THE POSSIBILITY OF SUCH DAMAGES.

Thought Leadership Disclosure:

Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. These risks are magnified for investments made in emerging markets. Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a portfolio’s investments.

The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person. You should consider the suitability of any type of investment for your circumstances and, if necessary, seek professional advice.

This material, intended for the exclusive use by the recipients who are allowable to receive this document under the applicable laws and regulations of the relevant jurisdictions, was produced by, and the opinions expressed are those of, Manulife Investment Management as of the date of this publication, and are subject to change based on market and other conditions. The information and/or analysis contained in this material have been compiled or arrived at from sources believed to be reliable, but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and is only as current as of the date indicated. The information in this document, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Investment Management disclaims any responsibility to update such information.

Neither Manulife Investment Management or its affiliates, nor any of their directors, officers or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained herein. All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients should seek professional advice for their particular situation. Neither Manulife, Manulife Investment Management, nor any of their affiliates or representatives is providing tax, investment or legal advice. Past performance does not guarantee future results. This material was prepared solely for informational purposes, does not constitute a recommendation, professional advice, an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security or adopt any investment strategy, and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Diversification or asset allocation does not guarantee a profit nor protect against loss in any market. Unless otherwise specified, all data is sourced from Manulife Investment Management.

Manulife Investment Management

Manulife Investment Management is the global wealth and asset management segment of Manulife Financial Corporation. We draw on more than 150 years of financial stewardship to partner with clients across our institutional, retail, and retirement businesses globally. Our specialist approach to money management includes the highly differentiated strategies of our fixed-income, specialized equity, multi-asset solutions, and private markets teams—along with access to specialized, unaffiliated asset managers from around the world through our multimanager model.

These materials have not been reviewed by, are not registered with any securities or other regulatory authority, and may, where appropriate, be distributed by the following Manulife entities in their respective jurisdictions. Additional information about Manulife Investment Management may be found at www.manulifeim.com/institutional.

Australia: Hancock Natural Resource Group Australasia Pty Limited, Manulife Investment Management (Hong Kong) Limited. Brazil: Hancock Asset Management Brasil Ltda. Canada: Manulife Investment Management Limited, Manulife Investment Management Distributors Inc., Manulife Investment Management (North America) Limited, Manulife Investment Management Private Markets (Canada) Corp. China: Manulife Overseas Investment Fund Management (Shanghai) Limited Company. European Economic Area and United Kingdom: Manulife Investment Management (Europe) Ltd. which is authorised and regulated by the Financial Conduct Authority, Manulife Investment Management (Ireland) Ltd. which is authorised and regulated by the Central Bank of Ireland Hong Kong: Manulife Investment Management (Hong Kong) Limited. Indonesia: PT Manulife Aset Manajemen Indonesia. Japan: Manulife Asset Management (Japan) Limited. Malaysia: Manulife Investment Management (M) Berhad (formerly known as Manulife Asset Management Services Berhad) 200801033087 (834424-U) Philippines: Manulife Asset Management and Trust Corporation. Singapore: Manulife Investment Management (Singapore) Pte. Ltd. (Company Registration No. 200709952G) Switzerland: Manulife IM (Switzerland) LLC. Taiwan: Manulife Investment Management (Taiwan) Co. Ltd. Thailand: Manulife Asset Management (Thailand) Company Limited. United States: John Hancock Investment Management LLC, Manulife Investment Management (US) LLC, Hancock Capital Investment Management, LLC and Hancock Natural Resource Group, Inc. Vietnam: Manulife Investment Fund Management (Vietnam) Company Limited. 

497899

William McPadden, CPA

William McPadden, CPA, 

Global Head of Real Estate

Manulife Investment Management

Read bio
Matthew Morano

Matthew Morano , 

Portfolio Manager, Real Estate Equity

Manulife Investment Management

Read bio
Matthew S. Warner

Matthew S. Warner , 

Portfolio Manager, Real Estate Equity

Manulife Investment Management

Read bio