Payroll Employment Jump Bodes Well for Continuing CRE Recovery

The market got a pleasant surprise in early January with a 200,000 rise in payroll employment in December, according to NAREIT Senior Vice President of Research and Industry Information Calvin Schnure.

"The report was a breath of fresh air, but we'll need stronger wind in our sails to keep this recovery going," Schnure said. "We expect the economy to build momentum gradually as the year progresses. Every analyst is cautious in predicting a 'recovery' as we've seen several false starts over the past two years or so."

As for ongoing risks, Schnure pointed to the ongoing issue in Europe and the ongoing housing crisis.

When asked how does the payroll employment boost translate into the outlook for REITs and commercial properties, Schnure said the outlook is pretty similar.

"Though the recovery is fragile, the risks are starting to recede and we expect conditions in commercial real estate to continue to strengthen in 2012," he said.

The key to this outlook is job growth, he said. "This is most obvious in the office sector, which has lagged to date due to the weak employment growth so far," Schnure said. "But payrolls are pretty lean as firms slashed their workforce during the recession and so far have been cautious in any new hiring. This means they will need to add new staff to deal with sales and output growth, which will help boost the demand for office properties."

Job growth also is needed to support consumer spending—and this paints a brighter picture for the retail sector outlook, according to Schnure. Retail sales have held up moderately well, considering the lackluster employment gains to date.

"One of the most encouraging pieces of information in Friday's employment report was that average hourly earnings picked up—they are up 2.1 percent over 12 months—this provides support for spending growth going forward," he said.

Apartment REITs have posted tremendous gains already; but Schnure said many investors might be surprised how much further upside there is to this sector. The housing crisis has shifted millions of households from home ownership into the rental market, and this has been responsible for the gains to date, he said.

"What's important going forward is the amount of pent-up demand still in the system. Household formation has been unusually low since 2008," he said. "Remember, the population didn't stop growing or getting older during the financial crisis and recession. As these people get jobs they will want to move out on their own, and in the current market, the lion's share of them will be going into rental housing."

He added that this comes at a time when the new supply pipeline is empty. New construction of multifamily housing plunged during the crisis.

"We estimate there has been a shortfall (relative to population trends) of roughly 500,000 units constructed since the recession began," Schnure said. "Even though multifamily housing starts have begun to turn up, they are still less than half the rate needed to make up the shortfall."