Economic Watch: Job Growth Slows in March as Fed Tightening Begins to Take Effect

Executive Summary

• The U.S. added 236,000 jobs in March. This nearly matched expectations of 238,000 and was the lowest monthly level since December 2020.
• The leisure & hospitality, private education & health care and professional & business services sectors had the biggest gains, while the retail and construction sectors had the largest losses.
• The unemployment rate ticked down by 10 basis points (bps) to 3.5% and the labor participation rate rose by 10 bps to 62.6%, its highest level since March 2020.
• Average hourly earnings rose by 0.3% for the month and 4.2% for the year, the lowest level since June 2021.
• Although the labor market is cooling, it remains historically strong, which along with persistent inflation likely will cause the Fed to raise rates by 25 bps at its next meeting in early May.
• Interest rate volatility and an economic slowdown will continue to limit commercial real estate market activity over the next several months. We expect capital markets activity to begin stabilizing around midyear, with a recovery in leasing activity to follow.

Impacts on Commercial Real Estate

Office

Office-using jobs increased by 38,000 in March, with professional & business services gaining 39,000 and financial activities losing 1,000. This mixed picture further complicates the office sector’s near-term outlook amid continued remote work trends and a softening economy.

Industrial

The transportation & warehousing sector lost 11,800 jobs, while manufacturing lost 1,000. We expect industrial & logistics fundamentals will remain relatively resilient, although demand should cool as the economy slows.

Retail

Traditional retail lost 14,600 jobs in March, while food services & drinking places added 50,300. The sector maintains relatively strong fundamentals amid little new supply over the past several years. However, less demand for retail space is expected as the economy slows.

Construction

The construction sector lost 9,000 jobs in March, with softness in both the residential and non-residential segments. Continued job losses are expected as rising interest rates discourage new residential and commercial construction.

Health Care

Health care gained 33,900 jobs in March. Ambulatory health care (outpatient services) added 15,000, while hospitals and nursing & residential care facilities added 10,900 and 8,000, respectively. Long-term demand for health-care properties should remain relatively resilient due to an aging population.

Hotels

Accommodation services added 5,200 jobs in March. While resurgent travel demand will support hotel occupancy in the near term, a slowing economy eventually will take a toll as household balance sheets deteriorate later in 2023.

Multifamily

Multifamily rent growth will ease as the economy slows. We expect any increase in unemployment this year will be relatively modest. This, in addition to single-family housing affordability issues—exacerbated by rising mortgage rates and limited supply—will help insulate multifamily demand from a slowing economy.

The Bottom Line

The labor market remained relatively strong in March. However, the Fed’s tighter monetary policy is starting to have the desired effect as evidenced by slower job growth and lower wage gains. CBRE expects the Fed will hike the federal funds rate one more time this year by 25 bps in early May.

We expect job growth will slow sharply in coming months as the economy slips into a moderate recession. This will negatively affect demand for commercial real estate in all sectors. We don’t expect a broad-based recovery in capital markets activity until interest rates stabilize around midyear and the economic outlook begins to improve.