Economic Watch: U.S. Labor Market Continues to Cool

Executive Summary

• The U.S. added 150,000 jobs in October, below consensus expectations of 170,000. Job growth totals for August and September were lowered by 62,000 and 39,000, respectively.
• Health care & education (89,000) and government (51,000) accounted for 93% of the jobs added in October.
• The unemployment rate rose by 10 basis points (bps) to 3.9%, while the labor force participation rate fell by 10 bps to 62.7%. Average hourly earnings were up by 4.1% from a year ago.
• October’s lower job growth should allow the Fed to hold interest rates steady, as a slowdown in the broader economy helps lower inflation.
• Despite a drop in the 10-year Treasury yield after today’s jobs announcement, we expect that long-term interest rates will remain above 4% for some time due in part to the large government budget deficit. This will continue to limit commercial real estate investment.

Impacts on Commercial Real Estate

Office

Office-using jobs increased by 13,000 in October, with professional & business services gaining 15,000 and financial activities losing 2,000. Corporate cost-containment measures likely will limit near-term demand for office space.

Industrial

The warehousing & storage sector lost 11,400 jobs last month, while manufacturing lost 35,000. We expect that industrial & logistics fundamentals will remain relatively sound due to continued strong consumer spending and e-commerce sales.

Retail

Traditional retail gained just 700 jobs in October, while food services & drinking places lost 7,500. Although consumer spending has remained strong, we expect that demand for retail real estate will weaken as the economy slows.

Construction

The construction sector added 23,000 jobs in October, with non-residential building construction gaining 2,600 and residential adding 3,700. Despite high interest rates, construction has remained relatively resilient due to fiscal policy supporting large commercial projects and to a shortage of single-family housing for sale. We expect these dynamics to continue over the short term.

Health Care

Health care gained 58,400 jobs in October. Ambulatory health care (outpatient services) added 32,400, while hospitals gained 18,100 and nursing & residential care 7,900. The aging population will continue to boost long-term demand for health-care properties.

Hotels

Accommodation services added 6,700 jobs in October. Although the sector is benefiting from pent-up demand, a slowing economy and the potential for less travel spending due to reduced savings and the restart of student loan payments will suppress demand.

Multifamily

The still strong job market continues to support household formation. This, combined with rising single-family home prices and high mortgage rates, makes homeownership unaffordable for many and will continue to drive demand for multifamily real estate over the near term.

The Bottom Line

October’s lower job growth supports our expectation of an economic slowdown this quarter and next. Whether this slowdown turns into a recession is less certain. Less job growth also supports our belief that the Fed is done hiking interest rates. We expect that tighter financial conditions and a high degree of economic uncertainty will restrain growth as consumer spending slows. This will help contain inflation and lessen the likelihood of additional rate hikes.

Although we think the Fed’s rate-hiking cycle has ended, CBRE expects that long-term interest rates will remain above 4% for some time. As a result, real estate investment activity will not recover until around mid-2024. We expect leasing activity will remain more resilient, although it will be subdued by a slowing economy.