Economic Watch: Strong February Job Growth Validates Fed Patience

Executive Summary

• The U.S. added 275,000 jobs in February, well above expectations of 198,000. Job gains in December and January were lowered by a combined total of 167,000.
• February job gains were led by health care, local government and food services & drinking places. There was a notable uptick in part-time jobs.
• The unemployment rate rose by 20 basis points (bps) to 3.9% and the labor force participation rate held steady at 62.5%. Average hourly earnings rose by just 0.1% for the month and 4.3% year-over-year, both slightly below expectations.
• February’s job gains appear to validate the Federal Reserve’s cautious approach to lowering interest rates. We do not expect the central bank to begin cutting rates before June.
• The continued high cost of capital will temper real estate investment activity during the first half of 2024. On the upside, leasing activity should be stronger than expected due to resilient job growth.

Impacts on Commercial Real Estate

Office

Office-using jobs increased by 10,000 in February, with professional & business services gaining 9,000 and financial activities adding 1,000. Although continued job growth should boost office demand, hybrid working arrangements and broader business climate uncertainty will continue to temper leasing activity.

Industrial

The warehousing & storage sector lost 6,800 jobs last month, while manufacturing lost 4,000. Despite some cooling in these sectors, a strong U.S. consumer—bolstered by a strong labor market—will ensure that demand for industrial real estate remains healthy.

Retail

Traditional retail gained 18,700 jobs in February, while food services & drinking places added 41,600. Retail real estate has benefited from healthy consumer demand and little new supply in recent years. However, we expect that retail demand will moderate as rising real interest rates slow consumer spending.

Construction

The construction sector added 23,000 jobs in February. We anticipate that high interest rates will continue to weigh on new construction; however, federal government policies continue to support nonresidential construction. This, combined with a single-family housing shortage and high mortgage rates that are pushing home buyers into new construction, should keep this sector relatively resilient.

Health Care

Health care gained 66,700 jobs in February. Ambulatory health care (outpatient services) added 28,000, while hospitals gained 27,700 and nursing & residential care 11,000. We expect that health-care employment will remain strong due to a persistent worker shortage, pent-up demand for medical services and an aging population. This in turn bodes well for medical property demand.

Hotels

Accommodation services gained 3,000 jobs in February. Even as pandemic savings are drawn down, real income growth is supporting resilient consumer spending.

Multifamily

Multifamily is expected to remain strong due to high mortgage costs, making rentals a more attractive option. Continued job growth that supports household formation will also fuel multifamily demand.

The Bottom Line

The U.S. labor market’s continued strong performance should allow the Fed to maintain its patient approach to cutting interest rates. We don’t expect the central bank to begin cutting rates until June. These anticipated cuts are key to our outlook for a soft landing, with inflation trending toward the Fed’s 2% target amid continued economic growth.

We expect a gentle decline in long-term interest rates to the upper 3% range by year-end. However, the strength of the labor market, as well as significant Treasury bond issuance to fund deficit spending, portends no substantive drop in long-term interest rates. This will limit investment activity. Leasing activity may be stronger than initially expected amid continued growth, although an uncertain business environment will likely temper occupier sentiment.