By Jimmy Hinton
Investors blushed at the ADP release of disappointing private sector payroll figures on Wednesday and undercut their expectations for the Bureau of Labor Statistics’ (BLS) September Employment Report, released earlier this morning. Specifically, ADP reported private sector payroll expansion of approximately 135,000 in September, and negatively revised August payroll expansion figures to approximately 157,000 (-20.3%). Depending on your perspective, the past several months represent the lowest private sector payroll expansion since either October 2012, when the economy was gaining significant momentum, or since October 2017, amid feverish work by Congress and the Trump administration to enact accommodative tax legislation. The immediate outlook is obviously different than both periods.
ADP’s data signal a deepening of cautionary sentiment among employers, with small businesses accounting for an unusually small portion of growth. In simpler terms, big and medium-size businesses are providing most of the growth as smaller enterprises look to cool their immediate strategies. The BLS’ report this morning further cemented the realties facing the economy.
Having added 136,000 jobs in September, per the BLS, the country continues to face issues filling a near-record 7.2 million job openings, ostensibly due to skills-gaps and rising wages demands given a 3.5% unemployment rate. Though the headline data disappoints, within the data we continue to see positive signals that can advise commercial real estate stakeholders toward a defensive late-cycle strategy.
Continuing a cycle-long trend, healthcare continued to provide the highest levels of growth (+40,000), driven demographically by an aging population that requires greater treatment infrastructure. This will encourage the proliferation of new healthcare facilities closer to consumers and force the more efficient use of that space.
Professional and business services (+34,000) expanded, though at a reduced rate relative to previous months, extending cautionary sentiment over the future of net absorption in the office property type. While office-using employment has expanded consistently throughout the recovery, Transwestern has witnessed certain markets benefitting from stronger resultant net absorption versus other locales. Additionally, the future of WeWork may weaken the correlation between job growth in this sector and the health of occupancy levels, especially in markets where WeWork maintains or plans a significantly concentrated presence.
Leisure and hospitality (+21,000) continued steadily, though the data is amid seasonal adjustments related to end-of summer and pre-holiday season staffing requirements. Still, the economy continues to add services-related employment to payrolls. Conversely, the retail property type has experienced well-documented attrition in payrolls (-11,400) as retailers and landlords alike strive to determine the balance of product mix, inventory and fulfillment strategy. The divergent path of hospitality and retail payrolls is at the root of investor preference for “experiential” retail assets as opposed to centers focusing on soft goods increasingly commoditized by e-commerce and direct-to-consumer platforms.
On the heels of this secular shift in consumer behavior, transportation and warehousing (+15,700) also expanded, supporting continued optimism for industrial real estate, especially properties geared to logistics. Conversely, manufacturing of durable goods (-4,000) points to continued contraction in the space most challenged by the Trump administration’s negotiations with China’s government. In the immediate future, Transwestern expects logistics-oriented industrial properties to outperform older manufacturing-related facilities. Additionally, as e-commerce companies focus on promising faster delivery time windows, the preference for smaller, in-fill properties has risen dramatically.
Construction (+7,000) firms continue to add skilled workers to payrolls, but growth has moderated as labor costs have stymied employer interest and instead are focusing on margin expansion.
Moving forward, investors will expect the Federal Reserve to cut interest rates another time before the end of the year. Continued moderation in payrolls may result in two cuts prior to 2020, especially if moderation accelerates to outright to job losses, which the country has now avoided for 108 consecutive months.
As Senior Managing Director of Research, Jimmy Hinton develops leading-edge research and predictive analytics to guide and support real estate investment strategy, asset selection, valuation and portfolio management for Transwestern and its clients.