December 7, 2018

Executive Summary

  • The U.S. economy added 155,000 jobs in November, below the consensus estimate of 198,000. The unemployment rate remained at 3.7%.
  • Average hourly earnings rose 3.1% from a year ago, in line with gains of between 2.8% and 3.1% since August. Wage inflation has largely been kept in check by weak labor productivity (increased output per hour worked) by historic standards, though productivity increased by 2.3% in Q3.
  • The labor force participation rate remained at 62.9% in November.

Commercial Real Estate Highlights

  • Industrial: The warehouse & transportation sector gained 25,000 jobs in November and is up by 192,000 jobs for the year. The manufacturing sector gained 27,000 jobs last month and is up by 288,000 jobs over the past 12 months.
  • Health Care: The sector gained 32,000 jobs in November and is up by 328,000 jobs over the past year. Health care is expected to be the country’s No. 1 growth industry over the next 10 years, according to the Bureau of Labor Statistics.
  • Retail: Retail trade gained 18,000 jobs in November and food services & drinking places gained 21,000 for a combined increase of 39,000 jobs, showing a continued shift toward restaurants/experience retail.
  • Office: The professional & business services sector gained 32,000 jobs in November and is up 561,000 jobs over the past 12 months.
  • Construction: The construction sector added only 5,000 jobs in November, but is up by 282,000 jobs over the past 12 months.


Today’s jobs report release caps a whipsaw week that saw a high degree of stock and bond market volatility. The steady but slightly disappointing addition of 155,000 jobs, combined with strong but expected wage growth of 3.1%, should add some calm to the market volatility that was led by concerns about the Fed raising interest rates too quickly and an escalating trade dispute between the U.S. and China. The Fed has since signaled that the path of rate increases may be altered, and the Trump administration announced that it would delay any further tariffs against China for at least 90 days.

Another concern is over potential long-term Treasury yield curve inversion, in which short-term yields surpass long-term yields. Inversion of the two- and five-year and three- and five-year Treasury yield occurred earlier this week, while the spread between the closely watched two- and 10-year Treasury has narrowed but not yet inverted.

November’s jobs report shows that the U.S. economy remains on strong footing (but not overheating), making another interest rate increase by the Fed later this month almost certain. Still, the Fed’s outlook for next year is becoming less clear, affecting odds of additional rate hikes. While the Fed is keenly aware of the signaling impact of a full yield curve inversion, in which 10-year Treasury yields are lower than two-year Treasury yields, it will not stop the Fed from raising rates in December. As Fed officials have signaled that short-term interest rates are “just below neutral,” the market is hoping this means that the Fed’s policy path may be altered after December’s expected hike.

As full yield curve inversion is possible before the end of 2018, here are a few things to keep in mind:

  • Long Leading Indicator: In all the prior yield curve inversions that precipitated a recession, there was a delay of around 12 to 18 months before the recession began (so capital demand is likely to remain for some time).
  • Non-Bank Financial Institutions: The supply of capital to CRE is deep and diverse and not as yield curve dependent as it has been in the past because of the rise of non-bank financial institutions. In short, the CRE industry should be more resilient this time because of this increased liquidity and less dependence on traditional lenders.
  • U.S. is Leading Global Growth: U.S. GDP growth is expected to remain strong. Nowcast forecasts of several of the Fed’s regional banks are for Q4 GDP growth of between 2.3% and 2.7%, which is well above the 2% baseline since 2010. GDP growth should be around 3% overall this year and outsized growth should continue at least through mid-2019.

As for fears over trade, the U.S. has suspended any further tariffs against China at least until March. In the interim, China has agreed to purchase materially more agricultural goods from the U.S. Market volatility likely will continue until a firm agreement between the two countries is reached.

Outlook for CRE

  • Transportation & Warehousing: Worker shortages are impacting occupier/landlord location decisions for warehouses. CBRE Research has found that the transportation & warehouse sector is the No. 1 net taker of jobs from other industries, which is clearly putting upward pressure on wages. Expect the sector to look hard at automation to fill the gap.
  • Manufacturing: Despite some high-profile recent announcements of plant closures, the trend has been for more manufacturing and more re-shoring. The question is whether this trend is durable.
  • Health Care: Health care is expected to be the No. 1 growth industry over the next 10 years and it’s no surprise that the sector had strong growth of 32,000 jobs last month. As a top-five user of office space, health care could replace tech as the No.1 user of new office space over the next decade.
  • Retail/Restaurants: The predicted demise of brick-and-mortar retail has been consistently disproved by recent monthly jobs reports and November’s is no exception with a gain of 39,000 retail and food services & drinking places jobs. The strength in restaurants shows continued strength in experiential retail.
  • Business Services: Office-using job growth remains the most important statistic in commercial real estate and the continued rise of professional & business services jobs is very positive for new office space demand.
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