10.2% Unemployment and the Impact on Commercial Real Estate

I know what you’re thinking: Why is Knakal addressing unemployment yet again? Simply, it is because last week’s announcement that the official rate has climbed to more than double digits further illustrates that the administration is incorrectly focused on things other than job growth.

As I have always stated, our commercial real estate markets need employment more than anything else to enhance our fundamentals and turn our outlook around. As unemployment increases, our fundamentals degrade and as our fundamentals degrade, our values drop. Until the trend in unemployment reverses, it will be nearly impossible to see tangible health return to any segment of commercial real estate. Our rising unemployment rate begs the question: How did job creation get put on the back burner?

In October 2008 in Toledo, Ohio, a major economic speech was delivered by then candidate Barack Obama. Let’s take a close look at what he said:

“Right now, we face an immediate economic emergency, and that requires urgent action. We can’t wait to help workers and families….who don’t know if their jobs……will be there tomorrow. … We need to pass an economic rescue plan for the middle-class, and we need to do it not five years from now, not next year, we need to do it right now. It’s a plan that begins with one word thats on everybody’s mind, and its easy to spell: J-O-B-S.”

That sounds pretty good and is pretty powerful. That sounds like focus. Mr. Obama gave the impression that job creation would be his top priority and that his action would be swift.

Gandhi once said that, “Action expresses priorities”. If this is true, job creation has, clearly, not been one of the president’s priorities. Recently, the administration has begun talking about job creation but this provides little comfort as this recession began two years ago.

The results of the off-year elections in Virginia and New Jersey have demonstrated that Americans are increasingly believing that the administration should not be prioritizing health-care, climate change, and financial regulation while hundreds of thousands of people continue to lose jobs each month. Nearly 90% of those voting in these gubernatorial races said they were worried about the direction of the economy and the majority of those who held that view voted for the Republican candidate. Are we looking at another 1994 (a year in which we saw a dynamic shift in political power) in 2010? If jobs do not become the priority, we just may be.

Could it be any more obvious that the objective on Pennsylvania Avenue is to push an entire agenda through before power is potentially lost in the midterm elections? This could be a tragic policy flaw which could lead to relinquished majorities in the fall of 2010.

This lack of focus on jobs has resulted in an official unemployment rate of 10.2% (the highest since 1983) and an underemployment rate of 17.5%. The latter takes into consideration those who are out of work and have stopped looking for work and those who are employed part-time who are seeking full-time employment.

Clearly, job creation has dropped from a top priority to just one of many, and President Obama has been remanded to pandering for patience and offering excuses. On one hand he argues that there is some good news in the awful numbers as things are indeed getting worse but at a slower pace. On the other, he constantly reminds us that he inherited this mess. How long can he continue to do this? Fair or not, finger-pointing is not effective policy.

The administration now claims that the stimulus has “created or saved” one million jobs. Does anyone really believe that?  (Maybe if Congress spends another $787 billion, it can get the jobless rate up to 12%). The data upon which this claim is based is of extraordinarily low quality and are not reliable indicators of job creation or the even vaguer notion of job retention. There are two major problems with the data. The first is a strong reporting bias. Those providing data are those who have received stimulus funds. If they are creating or saving jobs, they are likely to get more free money, hence, a strong incentive to inflate reality.

The second is that the government is using what is referred to as “gains-only” reporting.  When the government reports this figure, it wants us to believe that the new hires came from the pool of the unemployed and that they are net additions to the stock of employed workers. The data do not speak to the number of workers who left their current jobs to fill government sponsored jobs.  Because these data do not tell us where the workers come from and what happens to the positions they left, the numbers cannot answer the ultimate question: How many net jobs were created? The government is reporting the gross positive figures, not the relevant net figures.

On a monthly basis, the Department of Labor reports activity from the Job Openings and Labor Turnover Survey (Jolts). The Jolts data show that, in August of 2009, about 4 million workers were hired. Unlike the administration’s new jobs-created-or-saved data, the Jolts data also lets us know that about 4.3 million workers lost their jobs. How difficult is it to figure out what the relevant numbers are?

It is difficult to imagine a more complete repudiation of Keynesian stimulus than the recent evidence in our job market. Only 11% of the stimulus money is actually stimulative (spent on infrastructure) with significant percentages being spent on pork projects and non-stimulative transfer payments such as Medicaid and jobless benefits. The net effect is that net job creation has been negative. The much ballyhooed Keynesian multiplier that every dollar of government spending yields 1.5 times that in economic growth has, once again, been exposed as false. Few people remember that Keynes developed his theory when government spending only represented about 2% of GDP, a far cry from where it is today.

The policy lesson here is for both political parties (if you are  a frequent reader of StreetWise, you know that I try to critique both parties equally and, I believe, fairly). In 2008, President Bush caved-in and initiated the first “stimulus”, a $160 billion program that was ill-conceived and not very stimulative. Mr. Bush lost policy bearings during his last year and forgot that in order for a tax cut to be stimulating it must be immediate, permanent and at the margin of the next dollar. Instead, for the past two years, the U.S. and most of the rest of the world have been pouring trillions into a Keynesian black hole. Let’s not forget that this spending must be paid for at some point. Tax increases are inevitable and this expectation continues to stifle consumer spending.

If the administration is serious about wanting to create jobs (a by-product of which would be to help our commercial real estate markets) the best policy action would be to ask themselves and Congress, Why?…..

Why create so much investment uncertainty and additional barriers to businesses hiring new employees?

Why raise the costs of doing business by making it easier to unionize workers via “card check”?

Why raise energy costs for businesses with a cap-and-trade (“cap-and-tax”) bill?

Why add to an already inflated budget deficit and future tax burden with a 12% increase (proposed in the draft budget) in domestic spending in 2010?

Why force through Congress, on a partisan vote, a health-care bill that imposes a 5.4% income tax “surcharge” on anyone making more than $500,000? The Joint Tax Committee reports that about one-third of this $460.5 billion tax increase will be paid by small business job creators who file their taxes under the individual income tax code.

Perhaps someone should read Mr. Obama a transcript of his Toledo speech. Then maybe he will be reminded that he cannot wait for next year, he needs to act now and, very simply, it’s all about J-O-B-S.

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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15 Responses to “10.2% Unemployment and the Impact on Commercial Real Estate”


  1. 1 David Scop November 8, 2009 at 1:30 pm

    I believe that Robert hit the nail on the head.
    Before a small business thinks about expansion, they consider how their clients are doing.

    Before a large business expands they consider how their clients are doing.

    Across the board most of my retail or industrial clients are struggling to maintain their real estate, and some have considered downsizing for the first time in decades.

    Problem is there are no buyers for their properties. In todays tight equity market, financing requires double the cash component, and three times the amount of time to close.

    Job retention would take the legitimate fear out of the retail and industrial sectors.

    Unless and until that happens, we are in for rockier roads ahead.

  2. 2 Mr. Bippy November 8, 2009 at 8:06 pm

    Mr. Knakal,

    It is a given that the current economic crisis, aka “the great recession” we are in is due to obscene lending practices of the worlds largest financial institutions all the way down to the small community banks. These loosely regulated institutions created wealth for companies, businesses, and governments that never would have been there without this rapid and unsustainable growth. Like kids with an unlimited supply of sugar candy and a mother that encouraged them to eat as much as possible, we were all getting ready for a big headache or worse…. That mother was the Bush administration. Turning a blind eye to what was going on allowed us to get in over our heads.

    Your column seems to blame the Obama administration for these headaches. You always seem to be evenhanded with your analysis but here I think you have gone too far. While I would make the argument that the unemployment rate would be much worse than the 10.2% it is currently at if Obama did not enact the stimulus plan (of which only half has been deployed as of yet). The rate of decline has certainly begun to slow and many economists believe that it has bottomed out.

    Small businesses are the largest employers in the nation. They employ about 75% of Americans today. Because of the lack of credit available to small businesses, shrinking revenues, the decline of the almighty consumer, and rising costs, what are small businesses to do? They must lay people off or close their doors.

    So on top of the stimulus plan to bring cash into the system and encourage small business growth, Obama’s number one push is to lower health care costs (successfully passed in the House last night) How much does health care cost small to medium companies? Compare how much the cost has gone up in price to the inflationary index. We are going broke on being sick.

    Creating affordable health insurance will create more net profits for small businesses, which will then able them to hire more employees, expand, create, and eventually and bring more products and consumers to the market place.

    Businesses that are surviving today are becoming more efficient
    and this increase in worker productivity is now beginning to show profits. When we begin to grow again, we must do it responsibly at a pace that is sustainable.

    Putting blame on the Obama administration for the situation we are in today is unfair. They are doing what is necessary to be done in order to get those kids off the sugar diet and back on 3 squares a day.

  3. 3 rknakal November 8, 2009 at 11:12 pm

    Hi David, thanks for your post. Decisions are, indeed, made by people based upon their perspective. Across all sectors of the commercial real estate market, jobs will help strengthen all fundamentals.

  4. 4 rknakal November 8, 2009 at 11:33 pm

    Hi Mr. Bippy, Thanks for your post. By no means am I blaming the present administration for all of our problems today. A contributing factor to our problems was the fact that during the Bush administration, GDP grew by 15% and government spending grew by 58%. That was not a good thing.

    With regard to regulation, I doubt that thousands of regulators would have caught onto the exposure created by mortgage backed securities. I say this because even the bankers who invented the products were not in tune with the risks enough to dump all of those securities prior to their blowup.

    With regard to health-care, I am far from an expert. However, the cost estimate coming out of the Congressional Budget Office for Medicaid understated the true cost by a factor of 10. If they are equally successful with the new health-care bill, the true cost will be $10 trillion. Clearly healthcare needs to be overhauled but requiring all Americans to have insurance is likely to raise costs. Do you really want the government running another business?

    Lastly, waiting a year to focus on job growth was not good regarless of what party is in power.

  5. 5 hummbumm November 9, 2009 at 9:45 am

    the stimulus plan was unfortunately watered down due to political realities by so called moderate democrats and republicans. Obama may well be at fault for being too timid, but imagine if he had followed the Krugman prescription and came up with a $1.2T stimulus deal. What about the budget? it is all pork? it is not shovel ready? it is not tax cuts! spending bad!!!… blah blah. It is hard to make sound policy decisions when one of two political parties are in complete la la land vis a vis macro economics.
    Other than spending money there is not much government can do to push jobs. Furthermore it is not small businesses that create jobs but new businesses (obviously small to start), and one of the biggest obstacles to entrepreneurship is fear of expensive or unavailable health insurance. So tackling health care would spark more entrepreneurship in my opinion.

  6. 6 bennyb November 9, 2009 at 12:48 pm

    @Mr. Bippy – Obama’s stimulus only truly creates jobs in the public sector. The private sector especially small and medium sized companies need the attention & money. The rate of failing businesses far outmatch the rate of new businesses. Part of this is because it is just to expensive to start up and get a loan – but the other half is there is a lack of incentive provided by the government.

    I personally believe the government has gotten too involved with the way private business is run. But since they have already jumped in, they might as well focus on the main issues right now jobs and economic growth. Health care and the environment should be ancillary topics in congress right now.

  7. 7 CCummings November 9, 2009 at 5:42 pm

    Robert –

    Thanks for sharing this. It touches on so many issues that to many of us are fairly evident – both as US citizens and real estate professionals. The cause of the current mess originated when the securitization market became essentially bastardized through financial over-engineering and greed. Plain and simple. Whether some oversight committee or gov’t agency should have seen it coming is now immaterial. What is important is job creation, as you say. Party affiliations at this point in time are also immaterial to the layperson, or at least they should be. The bottom line is that the stimulus package has so far been ineffective with most of the money actually spent already earmarked for pet projects. Campaign rhetoric that boasts a top priority of job creation has fallen by the wayside as if the stimulus legislation was the be all and end all for jobs creation, and another “check” off the list. “Jobs creation – check! Move on to health care”.

    But now the administration is saying that health care is the President’s number one priority. I’m sorry, but as an American taxpayer and employee of a privately-owned firm, I don’t see ANY way that the health-care bill proposed will benefit small business or job creation. I’m worried that my firm will have to cut back on health benefits and 401(k) matching, and not be able to hire sufficiently going forward if this bill passes in its current form. Many of my friends who are small business owners share the same sentiment.

    Rather than help the economy, this bill has the potential to cripple the economy for decades to come with higher tax burdens on businesses and individuals and an insupportable national debt burden. The possibility of the US becoming insolvent is closer than many will admit.

    The point being that this administration had the ability to do something great with the situation that they were given. (And this is coming from a registered Republican). They could have chosen to focus on job creation first and foremost. They could have chosen to really reform health care by taking into consideration the myriad of proposals that have been laid out there by Republicans, Independents, citizens, economists and even moderate Democrats. But instead they chose to grab as much power as they possibly could while in office by (1) pushing through proposals that will certainly increase the welfare state, increase the size of government and essentially tie everyone’s future to the health of Uncle Sam, and (2) essentially paying lip service to the most pressing needs of the US. Can you imagine how long the Dems could stay in power if they focused on the real issues instead of decades of pent-up pet projects?

    Who cares who was in power 2 years ago, or 4 years ago or 12 years ago? What matters is who is in power now and what they are doing to address the most pressing issues FIRST. And that ain’t the creation of a larger government, additional public subsidies and more taxes.

  8. 8 Mr. Bippy November 9, 2009 at 10:51 pm

    Millions of jobs have been retained in the public sector. These have been school teachers, policemen, firemen and other government services. Without retention of these crucial jobs not only would our unemployment rate have increased but our quality of life would be diminished to levels not seen in generations.

    The stimulus package also contains earmarks for improving our national infrastructure not seen since the National Interstate and Defense Highways Act of 1956. This will create a strong downward pressure on the current unemployment rate, but also to help secure our future as the leading nation in this world.

    I argue that this administration is doing what it can to A. Retain jobs. B. Create Jobs. C. Drive down costs to small businesses by providing quality affordable health care.

    The last time the unemployment rate was at 10.2% was in April of 1983. In April of 1984 it was 7.8%. A decrease of about 25%. The unemployment rate is a lagging indicator. I suspect we will see a similar number in a years time.

    The stock market rallied today to it highest levels in over a year on comments from the G20 nations implying that it will continue to encourage stimulus plans around the globe.

  9. 9 JWB November 10, 2009 at 1:25 pm

    Blaming Bush and holding Obama accountable are 2 different things. It seems that is the Obama support response for everything, but sooner or later he is going to have to be held accountable independently.

    Public healthcare is a nightmare any way you look at it and another scheme to take our money away and piss it away or pay down interest like social security.

    But the bottom line even for the supporters of this health care plan is that it is the wrong medicine at the wrong time. Financially the US is already heavily burdened…we can’t afford it! Furthermore, this adminstration has done nothing pro-business, which should be the #1 priority right now.

    Like you said, jobs and the economy need to be the priority or he won’t have anyone to blame at the end of his first term.

  10. 10 Ugo November 10, 2009 at 7:07 pm

    I would disagree with your argument. When one actually looks a job losses or creation since this great “recession” began and Obama took over, job losses peaked early this year and have been shrinking ever since. In fact, last month temporary employment climbed for the first time in ages, which is an early indication employment is coming back. Anyone who’s studies economics knows that job creation will be fulfilled once employers feel the economy is back on track and perhaps I’m too conservative, but given what happened in the economy over the past decade, I’m quite certain every hiring manager out there is waiting to see if this is the real thing and waiting a long while to call it a real thing. You can see this via the productivity figures, which to no one’s surprise, jumped through the roof. Our memories cannot be so short to forget the gravity of the situation just one year ago…people’s psychology has been affected permanantly and greatly and companies are doing more with less.

    This is what happens each & every recession and this no employment turnaround was the same argument levied againt the Bush administration prior to his re-election. The economy, no economy, can ever recover so quickly to create jobs a mere year after a huge financial fallout that brought companies, once thought unthinkable, to their knees. This is much too rosy an expectation and we should not blaime any incoming administration for not steadying the ship quicker.

    So I would disagree, not so much in whether the stimulus will work, but rather at judging the outcome so quickly. Tax cuts aren’t always the answer, especially when we’ve been fighting two wars on tax cuts already…at some point, cuts simply won’t generate the money needed to pay off a decade’s worth of false conservatism with Bush. However, the stock market is clearly a leading forbearer of coming news…and it is up and highly. So I would revisit this column again in about 6 months and then in about one year, which is when I would expect hiring to come back.

    As far as healthcare, the company I work for was hit with a 30% increase in cost from one year to the next by a very large insurance company…if you think healthcare reform is un-needed or too “costly”, you’re not living in the world I live in. I’ve lived in Universal Healthcare countries and I can only pray we eventually get there here as well…its more effective, its cheaper and no one does the insurance run-around of changing doctor’s every year due to higher premiums. For a country with the world’s 33rd longest life span, some of the highest cancer rates in the world, the most fat country too boot, combined with the highest cost in healthcare in the modern world…Americans certainly are odd in their rabied hate of Universal Healthcare and support of for proft, 30% rate hikes per year, “insurance” companies.

    Thanks for sharing your thoughts via this blog.

  11. 11 Noel Susskind, PE, LEED AP November 11, 2009 at 12:40 am

    I agree with everything except the part about the cap and trade linkage to higher energy costs.

    Cap and trade is a great solution that leverages the open market. It is only marginally more expensive to business. Because in the wider scheme of things, cap and trade creates new opportunities as well as jobs. Innovation in energy production and consumption will lower the extreme dangers of global warming. I can’t think of a better way to encourage this for almost no taxpayer expense, so please leave cap and trade out of this argument.

  12. 12 Joseph Scarpa, LEED AP, Green, EcoBroker November 11, 2009 at 10:22 am

    Agree with all but “raise energy costs for businesses with a cap-and-trade (“cap-and-tax”) bill?”

    Pollution cost externalities have long been ignored by our [best-in-the-world] free market system. Excessive pollution costs have to be assigned to somebody–preferably at their source as opposed to the health system involving most Americans. And this is ostensibly best done at the federal level than leaving the regulation to individual state utility authorities.

    I read once that more birds die prematurely from air pollution than they do from wind turbines by an order of magnitude.

    I’d love to see a review on how the current–and past–administration have harnessed the talent of our Ph.D. economists at our universities. University-based research has been shown to be a great economic driver.

    Constructing and operating green buildings can mitigate the impact of cap-and-trade or carbon taxes.

    Instead of all the bureaucracy in approving economic-development loan guarantees and tax abatements, why not simply offer lower equity requirements or lower interest rates if the developer agrees to register for third party certification of their green building–and perhaps a percentage of the loan to be forgiven upon actual certification of the green building?

    Non-government organizations such as the U.S. Green Building Council are in place to accomplish such certification and jobs can be “created” on day one with positive long-term healthcare implications for the building occupants (better indoor air quality) and the entire citizenry (better outdoor air quality)!

  13. 13 Commercial Real Estate Coach November 11, 2009 at 2:55 pm

    Politics aside, the very nature of any economic base is employment. Whether termed as “distressed”, “toxic” or “value-added”, the commercial real estate market needs help. Stimulate employment and we stimulate our industry.

    While I appreciate the review of the past and current administration’s missteps, but would applaud the suggestion of concrete solutions.

  14. 14 urbanexus November 18, 2009 at 11:43 am

    Thanks for calling attention to this important topic. The jobs that will not take care of themselves are the manufacturing jobs. The low value-added, low wage jobs have gone abroad and will not come back–nor should we really want them back. I believe the USA can compete for the higher value added, higher wage jobs but only if there is a continuing and coordinated effort between government, firms and labor. We need a smart industrial policy and–unless I am missing something–I do not hear the Obama Administration even taling about that.

  15. 15 commmercial property November 26, 2009 at 7:17 am

    yeah,Cap and trade is a great solution that leverages the open market. It is only marginally more expensive to business.


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