Unemployment’s Continued Climb and the Effect on Commercial Real Estate

If you are a frequent reader of StreetWise, you know that I am always following trends in unemployment, and for good reason. There is no other metric that more profoundly affects the fundamentals of our real estate markets.

If someone has lost a job or believes they may be losing a job, they will typically not move into a larger rental apartment or decide to move from a rental unit into a newly purchased condo or single family residence. If employers are reducing the size of their staff, they no longer need the same amount of office space. These people watch their spending and tend to travel less. The effects on retail sales and hotel performance are obvious.

The news on the unemployment front of late has not been positive. The Bureau of Labor Statistics currently pegs the unemployment rate at 9.8% meaning that approximately 8 million jobs have been lost during this downturn. This rate has more than doubled from 4.8% just 19 months ago.  The cumulative job losses over the past 9 months have been far greater than during any other 9 month period since World War II, including the military demobilization after the war.

The job losses now exceed the net jobs gained over the previous nine years, making this the only recession to wipe out all job growth from the previous expansion since the Great Depression. Private sector payrolls today are lower than they were at the end of 1999.

The stress in the job market appears to be understated by the BLS as the calculation of unemployment was modified during the Clinton administration to make the numbers appear more benign. Nearly 2 million people are unemployed but have given up the search for work. If they have not been actively looking for a job within the 4 weeks preceeding the latest survey, they are no longer counted as unemployed.

Part time workers who would prefer to be employed on a full-time basis are also no longer counted among the unemployed. The number of these “underemployed” workers has more than doubled in this recession to over 9 million, representing about 6% of the workforce.

If we add those who have given up the search for a job and the underemployed to the government’s estimate of 9.8%, the unemployment rate jumps to over 17%. And even this does not tell the entire story.

Nearly every day we read about additional companies that are asking employees to take unpaid leave or furloughs. They are not counted among the unemployed. The average work week for rank-and-file employees in the private sector, which makes up about 80% of the workforce,  has been reduced to less than 33 hours. This is nearly an hour less than it was before the recession began and the lowest level it has been at since the government started tracking this data in 1964.

The average length of unemployment has now reached 26.7 weeks, the longest time period since this data has been tracked going back over 60 years.

These statistics do not bode well for the administration’s stimulus plan which was implemented initially to create 4 million new jobs. After the $787 billion package was passed and it became clear that there was nothing in the plan which would induce job creation anywhere near this magnitude, the goal was changed to 4 million jobs “created or saved”. We all know it is nearly impossible to prove what jobs were saved.

When will these jobs return? Not only do we need to replace the 8 million lost jobs but our economy needs an additional 100,000 jobs per month to keep up with population growth. Even if job growth returns to the rapid pace of the 1990s, during which we were adding 2.5 million public sector jobs per year (double the 2001-2007 pace), the U.S. wouldn’t get back to a 5% unemployment rate until late in 2017. Other estimates are more bullish putting the estimated date at 2014. An estimate which is troubling for the commercial real estate market is that unemployment is expected to remain above 8% through 2012.

Many economists have stated that the economy recently entered recovery mode. It is important to note, however, that without jobs, you don’t have a genuine recovery. Consumer spending is the economy’s main driver and without job growth and pay raises, consumer spending will not revive substantially. This is particularly true because alternative sources of spending power, including home equity and credit cards, are largely tapped out.

During the last recession, in 2001, the number of jobless people reached a little more than double the number of full time job openings. By the beginning of this year, job seekers outnumbered jobs four-to-one and, today, the ratio has reached six-to-one.

As the economy gets tangibly healthier, there is a fear that employers will continue to make strides wringing more production out of fewer workers. Even as demand picks up, they may be able to hold off on hiring.

There is some hope that the job market may rebound more quickly. One thing different about this recession is that so many of the job losses have been at service related companies that have come to dominate U.S. employment. Since the recession began, 3.3 million service sector jobs have been lost, a 2.9% decline which is the largest recorded since 1939. In comparision, the previous two recessions each saw service sector jobs fall by only 0.5%. Service related firms may have a more pressing need than manufacturers to rehire workers as demand comes back.

A key question remains: How bad do things have to get before the Obama administration and Congress make job creation a priority? The speed with which the health of our commercial real estate market returns may just depend on the answer to that question.

Mr. Knakal is the Chairman and Founding Partner of Massey Knakal Realty Services in New York City and has brokered the sale of over 1,000 properties in his career.

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17 Responses to “Unemployment’s Continued Climb and the Effect on Commercial Real Estate”


  1. 1 Ed Tristram October 12, 2009 at 10:01 am

    Glad you’re doing this blog; I’m a faithful reader and feel I always get good information.

    What type of job creating strategies for the Federal government would you be comfortable with?

  2. 2 r lobel October 12, 2009 at 10:03 am

    Bob,
    The Administration has clearly dropped the ball on this.
    Without doubt, since 2002, a disproportionate amount of jobs was created in the construction industry. These (mostly) semi-skilled laborers were the first to be laid off when the housing bubble collapsed.
    As we all know, the bulk of the bailout money was given to the banking system which has been hoarding the capital (playing the arb between cost of Fed capital and Treasury’s and thereby showing some sort or return to profitability) instead of making much needed loans.
    What is needed is simple and straight forward (probably why it is not getting done!): put those millions of lost construction jobs back to work via the creation of much needed low-income housing, rehab and building of new schools, and how about for good measure, building of new hospitals, medical an nursing training facilities (which the Health Care reform debate seems to have missed completely).

  3. 3 TommyD October 12, 2009 at 11:54 am

    Yup! We’re screwed. I think the Obama’s administration economic remedies (Keynesian stimulus, bailout after bailout and delaying to pain of banks taking their losses) will have the same effect in the USA as similar failed efforts by the Japanese to spend their way out of a bad recession had in the early 1990’s. For Japan the 1990’s have been called the ‘lost decade’. However; it actually worse. It took Japan 18 years to rise back up to the economic level before its decline. That’s 18 years just to get back to even. What about all the gain they should have enjoyed. Perhaps, it took them as much 25 years to get back on track. That’s basically most people’s entire working careers. Yup! We’re screwed … and now there’s talk of a 3rd Stimulus progam.

  4. 4 terrig October 13, 2009 at 6:13 am

    An economy based on 70% of its activity coming from consumer spending is unsustainable. Period. Policymakers kept the party going on for years because it’s hard to end a party (or bread & circuses). Which leaves a cleanup that is larger & longer.

    As an economy we need to provide goods & services that improve productivity, not just consumer spending. The fall of the dollar is not crazy, as a country we’re too pampered, and don’t make anything of value. Perhaps a falling dollar will help us restore the balance of actually making something and selling services to the rest of the world.

    Job creation is going to come from a slow (and probably painful) structural realignment of the economy, not from another government program. There are no magic bullets. We’ve been in decline for years, but the statistics have been “messaged” for years, low CPI (my budget doesn’t show that, and the gov’t has been fooling with that number for years — I happy to provide more info on that one) and low unemployment (here you describe how the number has been manipulated as well.)

    As things look right now, China is the next world power – they work hard, save their money and actually make goods & provide services that people buy. Germany which has been a net saver country and still makes things that people buy is holding up much better despite structural issues such as demographics.

    There are no magic policy bullets. Policies that simplify our tax structure and regulation would be a good start, not another bogus “jobs” program. I’d add that a national health insurance program for ALL would help unleash America’s entrepreneurial spirit. Many would be entrepreneurs are intimidated by the health insurance issue, and can’t be without.

  5. 5 Norm Steinberg October 13, 2009 at 8:12 am

    Bob, Couldn’t agree with more your assessment.

    We need people working in order to positively affect the real estate markets. Profits at corporations are up today because expenses have been reduced. The beginning of a recovery – currently a jobless recovery.

    If the stock market continues to increase that may create a “wealth affect” effect to spur on consumer confidence, spending, and ignite small fires in the real estate markets.

    However sustained healthy growth of the real estate markets will not occur until people are put back to work and they have more money to spend; especially discretionary income.

    Am concerned that on a macro level, RE execs are not calculating the affect of technology and the internet on the asset class. Included two examples i.e.;

    1) Turmoil in the selling of books. When Amazon started selling books over the internet it was a switch from pricey retail real estate in urban/suburban areas to industrial warehouses in semi-rural areas. A net decline in SF I am sure also occurred. When they introduced the Kindle – their e-reader – no longer need as much warehouses to store the books or industrial space to print the books (printers, binders, etc;)

    2) Cloud computing and the creation of virtual data centers. From corporation’s office space and back office space to massive data centers, some of it outsourced. Will also result in a negative decline in total RE utilized.

    Both will have a negative impact on job growth as well.

    Great Article!

  6. 6 Susan Seckel October 13, 2009 at 2:28 pm

    Thanks for talking about real employment numbers…wish there was more concrete discussion and direction for those of us without employment.

  7. 7 Jack McKeown October 15, 2009 at 8:49 am

    Bravo, Mr. Knakal, for so clearly limning the unemployment question facing our new administration. The media ought to stop reporting the “official” (read “phony”) unemployment statistics in favor of the broader measure you propose. A glance at the Bureau of Labor Statistics website tells the real story every month.

    If it weren’t for pieces like yours, and of economists like Paul Krugman, that convey a genuine sense of urgency, we would all be pulling our collective hair out—what little there is left of it after the last twenty-four months.

  8. 8 Andrew October 15, 2009 at 1:32 pm

    Very interesting analysis and very startling numbers.

    I also touched on this subject, discussing the notion of a “recover-less” recovery, in a recent blog:

    http://netleasenation.blogspot.com/2009/10/is-there-such-thing-as-recover-less.html

  9. 9 rknakal October 15, 2009 at 10:37 pm

    Hi Ed, thanks for your post. Tax incentives for small business would be a huge factor in creating jobs. Lower tax rates across the board would also be a big help. People might say that we need the tax revenue to bridge the deficits but reducing spending is a better long term solution.

  10. 10 rknakal October 15, 2009 at 10:41 pm

    Hi Robert, good points. By the middle of next year, the construction industry will be employing less than 50% of the people that it employed in 2006 (regardless of what the official unemployment rate will show). You are correct that building hospitals and schools and affordable housing would be a great use of this underutilized human capital. We need affordable housing desperately and the government should build it rather than taking private property for public use which is what New York’s rent regulation system does.

  11. 11 rknakal October 15, 2009 at 10:44 pm

    Hi Tommy, Thanks for the post. We sure will be if we dont get back on track soon. We need jobs and Washington is ignoring this fact. Fed policy over the next few years will be very interesting to watch.

  12. 12 rknakal October 15, 2009 at 10:46 pm

    Hi Terrig, Thanks for your post. One point that I must make is this: Never count out the U.S. consumer.

  13. 13 rknakal October 15, 2009 at 10:51 pm

    Hi Norm, Thanks for your post. You make some good points. It will be interesting to see what types of businesses will be created in the next wave of growth and what type of space users they will be. I am very curious to see what all of those “green jobs” are going to look like. I have not heard a reasonable articulation of them.

  14. 14 rknakal October 15, 2009 at 10:52 pm

    Hi Susan, thanks for your post. Best of luck to you in your pursuit of employment. If there is anything I can do for you, please let me know.

  15. 15 rknakal October 15, 2009 at 10:55 pm

    Hi Jack, thanks for your post. I just try to call it like I see it. I’m glad my perspective is resonating.

  16. 16 rknakal October 15, 2009 at 10:55 pm

    Hi Andrew, Thanks for your post. The more awareness there is about this issue, the more likely something might be done about it.

  17. 17 Carl Todd October 17, 2009 at 1:10 pm

    rk
    A must read book on how we got to this having Main St. loose the needed recovery support and you and the rest of us being thrown to winds saving, protecting and rewarding Wall Street read Nomi Prins current book: “It Takes A Pillage”.

    Obama’s 4 hour visit to a hurricane devastated section of New Orleans that is begging for at least one general care hospital to replace the the four that were destroyed and never replaced and leaving the area for a west coast fund raiser without ordering Sec. Sebelius to immediately rectifying that situation and the army engineers to be sure the dikes can withstand a category 5 storm but at the same time is considering sending troops and billion more in Afghanistan to impose a governmental system that is contra to their culture at the same time supporting a corrupt administration that is causing the tribal areas to prefer the Taliban to it tells anyone with their eyes and ears open we’re in deep shit trouble.

    The change I and so many looked forward to is not what we are getting. We are getting more of the same we wanted changed in spades!

    This current administration is a bigger disappointment to me than when I was a kid during the depression not getting the bicycle I so wanted for my birthday. Not getting the bicycle only affected me this current disappointment effects all of us not part of the Wall St. inner-circle.


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