The U.S. labor market continues to defy expectations, as the latest data for September 2024 revealed a notable gain in jobs. According to the Bureau of Labor Statistics (BLS), the U.S. economy added 254,000 jobs last month, surpassing estimates by a surprising margin. This sharp increase in employment has sparked both optimism and concern among investors. While the report indicates robust economic activity, it raises questions about inflation, interest rates, and how these factors may impact commercial real estate (CRE) investors and broader capital markets. Prior to the jobs report, the narrative centered around concerns over the softening labor market and was largely the justification for the Fed’s jumbo rate cut in September. So, what does this mean?
A Closer Look at the Numbers
The September jobs gain of 254,000 was about 70% higher than the consensus estimates of 150,000. Job growth showed significant gains in restaurants, retail, and construction. Additionally, this strong performance comes with notable wage growth. The average hourly earnings increased by 0.4% month over month and up 4% from a year ago suggesting that employers are hiring and raising wages, which could impact inflation.
The unemployment rate ticked downward to 4.1%, a 0.1% drop from the prior month. However, this unemployment alongside a significant job gain complicates the narrative for the Federal Reserve’s interest rate policy.
Impact on CRE Investors
Clearly for the market, job gains signal health for the economy and that is a win. But for CRE investors, the September labor data presents a mixed bag of outcomes. On the one hand, job growth signals positive momentum for real estate, as more jobs typically mean increased demand for (dare we say it) office space, as well as retail outlets and multifamily housing. The leisure and hospitality sector, in particular, experienced strong hiring, which is a positive signal for hotels and other commercial properties in that industry. Increased employment could boost demand for space in urban centers as more workers are expected to return to offices.
However, the strong labor market complicates the inflation picture. The market will get a better picture this week when CPI is released. All along, the Federal Reserve has maintained a hawkish stance on inflation. Any signs of inflation rearing its head could raise questions about future rate cuts in the short term. And that is not great for borrowers and other participants who are eager to refinance loans to lower their debt service. Additionally, high borrowing costs for developers and property owners could stall capital flows into real estate investments if investors expect financing costs to rise further.
Impact on Capital Markets
The strong jobs report has sent ripple effects through capital markets as well. Initially, stock markets reacted positively to the labor data, seeing it as a sign of continued economic resilience. However, investor enthusiasm was tempered by concerns that the Federal Reserve might interpret this as a signal to maintain or even increase its restrictive monetary policy stance. The 10-year Treasury yield, a key benchmark for real estate financing, also spiked to above 4% Monday morning following the labor report. Rising yields typically increase the cost of capital, making CRE deals more expensive to finance.
CRE investors are keeping a close eye on the Federal Reserve’s next steps. Inflation data and the October jobs report will provide more insight before the next FOMC meeting. And with the kick-off of another earnings season, investors will get an updated look at the health of the consumer economy. If the Fed decides to pause interest rates, the capital markets could see heightened volatility, and real estate assets could experience further price corrections. We’ve seen in the past two years that higher borrowing costs and reduced liquidity resulted in lower transaction volumes, especially in highly leveraged sectors.
CRE Outlook: Opportunities Amid Uncertainty
Despite the uncertainty surrounding interest rates and inflation, for now transaction activity has picked up, according to LightBox data. Our team highlighted some of the sector-specific impacts to the recent Fed rate cut—those generally still hold true. Industrial real estate, remains a strong performer, supported by long-term trends such as e-commerce growth, AI, and data center demand. Additionally, multifamily properties in growing metropolitan areas continue to attract investment, driven by a lack of affordable housing inventory. Investors with a longer time horizon are also finding value in distressed assets or development opportunities that could become more affordable as rates stabilize.
For CRE investors, the key is to remain vigilant and adaptable. While the job market’s strength bodes well for property demand, the potential for higher financing costs should be factored into investment decisions.
So, No Recession?
The September labor data underscores a key tension facing investors today: the U.S. economy’s resilience could lead to a slowdown in the easing of monetary policy from the Federal Reserve, potentially keeping the cost of capital elevated and dampening the recovery for CRE. Expectations are that the October jobs report won’t be as rosy with the impact from Hurricane Helene and the Boeing strike. But we’ve been surprised before. For CRE investors, the path forward lies in balancing the positive signals of job growth with the challenges posed by elevated interest rates.
Ultimately, whether September’s job gain is good or bad news depends largely on how the Federal Reserve interprets the data—and how CRE investors position themselves in response.
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