Market Commentary

The job market got off to a roaring start in 2015—and, as it turns out, hiring was also stronger at the end of 2014 than was initially reported. According to the most recent data, nonfarm payroll employment rose by 257,000 in January, and the average monthly growth for Q4 was revised up to 324,000—well above the 289,000 that was previously published (chart 1). Most sectors posted robust job gains, including construction, manufacturing, retail trade, business services, and health care and hospitality. Government employment declined slightly.

GDP growth slowed to a 2.6 percent annual rate in the fourth quarter, from 5.0 percent in Q3. Despite the deceleration in the headline number, however, the report was strong where it counts. Consumer spending, the mainstay of the U.S. economy, accelerated to a 4.3 percent annual growth rate, the strongest gain since 1993. The slowdown in overall growth stems from a decline in net exports due to weaker growth abroad and a stronger dollar.

The fundamentals for the apartment sector are rapidly improving as the job market recovery gains momentum. Demand for rental housing surged in 2014, with the total number of occupied rental units increasing by 2 million units (first slide). This is a record increase in rental occupancy, according to Census Bureau data beginning in 1965, surpassing by a wide margin the previous record rise in rental occupancy of 1.5 million at the onset of the housing crisis in 2007.

Listed U.S. REITs returned +7.53% during January 2015 according to the FTSE NAREIT All REIT Index, which measures the total returns (stock price appreciation plus dividend payments) of all REITs traded on major stock exchanges in the U.S.  In contrast, the broad U.S. stock market suffered a decline at -1.47% according to the Dow Jones U.S. Total Stock Market Index.  Small-cap value stocks—sometimes mistakenly considered similar to REITs—did even worse at -2.11% according to the Russell 2000 Value Index, while large-cap stocks also underperformed at -1.73% according to the S&P 500 Index. 

Sustained above-trend job growth is having a broad impact on commercial property markets. Demand for rental housing has accelerated this year, allowing the apartment sector to absorb a significant increase in new supply with little impact on vacancy rates.

The outlook for commercial real estate markets and REITs has continued to evolve as the overall macroeconomic recovery matures. It is important to keep in mind just how much the momentum has changed. Two years ago, for example, the consensus outlook among the economists surveyed by the Wall Street Journal anticipated job growth averaging 160,000 per month. In January 2015, this panel expected job growth of 230,000 per month. It is certainly good news that after several years of disappointments, the economy finally appears to be hitting its stride.