EMPLOYMENT GAINS ECHO ECONOMIC STAMINA
Job growth overcomes inflation concerns. Total employment increased by 390,000 personnel in May, consistent with April hiring, while the unemployment rate held at a historically low 3.6 percent for a third consecutive month. Continued job creation is an important baluster amid economic turbulence stemming from elevated inflation and rising interest rates. June will likely bring the year’s third rate hike from the Federal Reserve, as well as marking the start of quantitative tightening. Higher interest rates are beginning to temper sales in the housing market, while price increases are weighing on consumer sentiment and personal savings. Retail spending has nevertheless continued to advance in real terms in recent months, bolstered by climbing wages, reflecting an overall positive economic trajectory.
Structural forces underscore space demand. Multiple factors continue to enhance the needs of renters and tenants for a range of commercial spaces. The ongoing housing shortage, underlined by millennial family formation, drives demand for rentals, while the aging of the baby boomer generation emphasizes the necessity for medical offices and seniors housing. The removal of most mask mandates and other health restrictions, particularly in the Northeast and along the West Coast, is supporting foot traffic at retailers, hotels and offices. Across most property types, construction is also falling short of demand, hindered by shortages of materials and labor, aiding vacancies and rents.
Investment plans become more dynamic amid tighter margins. Strong property fundamentals are continuing to draw investor interest, keeping cap rates at historically low levels across most property types. As such, higher interest rates are pinching yield spreads, emphasizing the importance of value creation on behalf of buyers. Some investors are focusing more on properties where rents can be frequently adjusted, as is the case with multifamily, self-storage and lodging. At the same time, retail and office spaces are poised for a potential absorption lift from tenants later in the year, which could present some upside opportunity for buyers.
* Through May Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; Federal Reserve; RealPage, Inc.