By Roland Li
Last week, the U.S. Department of Labor reported that the country added 216,000 jobs in March, although the national unemployment rate remained relatively unchanged at 8.8% percent. While encouraging, the statistics indicate that a true national recover is still months, if not years away, according to sources, and uncertainty remains in the local office market.
“The pace of improvement is still relatively weak,“ said Sam Chandan, global chief economist and executive vice president of Real Capital Analytics and an adjunct professor at the Wharton School. “It will take several years before we see the unemployment rate and employment levels return to normal levels.”
Some of the strongest gains were in the healthcare and education sectors, but those fields are traditionally less dampened by market cycles. Meanwhile, growth in traditional Class A office tenants, such as financial and legal services, lags behind.
“We have yet to see meaningful improvement,” said Chandan, referring specifically to financial services. “Year-over-year, we are still losing jobs.”
As a result of unemployment, the composition of the local tenant base has shifted in Manhattan. While large law firms and the remaining banks continue to lease prime buildings in the Plaza District and midtown, previously underrepresented sectors, such as information technology and new media, have expanded their presence.
Employment and wages also have a profound effect on retail. Recent months have seen a rise in spending due to savings from tax cuts, said Chandan, but a lack of wage increases means that retail spending growth is unsustainable. Wage stagnation is tied to the oversupply in the job market – without a tightness in the labor pool, wages are unlikely the increase.
Meanwhile, uncertainty around the Dodd-Frank financial reform law constrains job growth, while geopolitical instability weakens the global economy.
However, the outlook appears rosier in Manhattan, compared to the rest of the country, with professional services, accounting and advertising also seeing job gains, leading to an upswing in leasing.
“The pace has definitely begun to pick up,” said Ken McCarthy, senior economist and senior managing director of research at Cushman & Wakefield. “I think you have to say this is positive for commercial real estate markets, particularly office.”
Also, in contrast to the residential markets, the last boom wasn’t marked by a glut of new office development, which was partially responsible for a lower office vacancy when the recession technically ended.
“We ended the recession with a vacancy rate that was lower than the end of the last recession in 2003.” said McCarthy.
That trend is an encouraging sign for landlords seeking to fill properties, and there is a relative dearth of new Class A office construction, mainly concentrated in the World Trade Center complex.
Meanwhile, the city continues to outperform the rest of the country in both job growth and leases. According to Cushman, in the fourth quarter of 2010, the national vacancy rate in central U.S. cities was 14.4%, while the vacancy rate was 10.6% in midtown Manhattan, 11.5% in downtown and 8.6% in midtown south. (First quarter numbers will be released this week.)
“The pace of job growth has accelerated, and I expect it to continue,” said McCarthy. “I look at the next three quarters as ones of healthier growth.”