Executive Summary

  • The 10-year Treasury rate briefly jumped above 1.6% to its highest level so far this year following the release of a better-than-expected jobs report for February.
  • CBRE currently forecasts a 10-year Treasury rate of 1.8% by the end of 2021 and 2.2% by the end of 2022.
  • The U.S. added 379,000 jobs in February, more than 90% of them in the leisure & hospitality sector. Expectations had been for a gain of 210,000 jobs.
  • The unemployment rate fell to 6.2% and the labor participation rate remained at 61.4%.
  • February’s jobs report, while better than expected, showed some underlying weakness in the construction and government sectors.
  • While CBRE expects the U.S. economic recovery to accelerate beginning in Q2, recovery of commercial property sectors—particularly office, retail and hotels—will take longer. The rise in long-term interest rates is a sign of gathering economic momentum and may help cool an overheated housing market.

Commercial Real Estate Highlights

  • Office: Office-using jobs increased by 58,000 in February. Professional & business services added 63,000, while financial activities lost 5,000. Continued employment growth in professional services bodes well for office demand. CBRE does not expect a material recovery in leasing to begin until the second half of 2021, when widespread vaccine administration effectively renders offices safe to reoccupy.

  • Industrial: The warehousing & storage sector lost 1,100 jobs in February, while manufacturing gained 21,000. Despite softness in warehousing & storage jobs, the economic outlook and improving retail sector indicate continued growth and resilience for industrial & logistics markets.

  • Retail: Traditional retail gained 41,100 jobs and food services & drinking places gained 285,900. Loosening restrictions amid an improving public health situation across the country propelled growth in these sectors. Accelerated vaccinations and the broader economic outlook bode well for physical retail as 2021 progresses.

  • Construction: Construction employment fell by 61,000 jobs in February, mainly among nonresidential specialty trade contractors. Residential construction employment remains strong. Though higher interest rates can be problematic for construction, CBRE does not expect rates to rise enough to materially harm the sector.

  • Health Care: Health care gained 19,900 jobs in February. Ambulatory health care (outpatient services, such as doctor and dentist visits) gained 28,900. Hospitals lost 2,200 jobs, while nursing & residential care lost 6,800. Overall demographic and technological trends will continue to support growth in health care and the broader life sciences sector, fueling demand for medical properties.

  • Multifamily: An improving labor market and the likelihood of additional fiscal stimulus will support multifamily fundamentals. Demographic trends and housing affordability will also continue to fuel demand.

  • Hotels: Accommodation services gained 35,700 jobs in February. CBRE expects an uneven recovery for the hotel industry that will extend to 2024, with pockets of strength in markets that cater to domestic leisure travelers. This outlook is brightening amid fewer COVID-19 infections, an acceleration in vaccinations and indications of pent-up demand.

The Bottom Line

February’s jobs gain of 379,000 was well above expectations of 210,000, though there were notable losses in the construction and state & local government sectors. The strong headline number briefly pushed the 10-year Treasury rate to a year-to-date high of 1.62% and equities rallied. While CBRE expects rising inflation and higher interest rates over the near term, we do not believe they will reach levels that disrupt the economic recovery.

CBRE forecasts that the 10-year Treasury rate will rise to 2.2% next year but not go higher for the following reasons:

  • The U.S. economy employs approximately 9.5 million fewer people than it did in February 2020.
  • Inflationary pressures likely will be transitory as the effects of fiscal stimulus wane.
  • The global economy remains challenged—particularly in Europe—which will weigh on interest rates.
  • Additional adjustments to monetary policy, such as “Operation Twist” to push down yields on the long end of the curve, remains a distinct possibility.