There has been much attention lately on jobs in the US, be it through bringing jobs back to the country, keeping jobs from leaving the country or otherwise.
The link between jobs and the US commercial real estate industry is undeniable, as the latter relies heavily on the former to support market health. Robust job growth, after all, means that companies are spending, growing and leasing more space.
Job growth also attracts investors. A case in point is Los Angeles, where a strong employment trajectory has helped make it the top destination in the Americas for global investment capital for the second consecutive year, according to CBRE’s 2017 Global Investor Intentions Survey.
Drivers of job growth can be fickle, though. When an administration aims to facilitate job creation, it tends to focus on industries that require fewer prerequisites and can employ and train a large number of people quickly, such as manufacturing and infrastructure. Historically, these segments helped build the economy, kept it strong and brought it back from recession. Many still believe that is the case, but in recent years the technology revolution has changed job profiles dramatically.
Manufacturing employment in the US has steadily decreased since the late 1970s and many of those lost jobs were replaced by automated production, although the industrial market isn’t deeply impacted since space is still required for machines. Industrial vacancy remains extremely tight in most US markets, aided by the considerable growth of e-commerce and last-mile requirements and conversions to creative office that helped stave off any potential rise in vacancy.
There is a consensus about the need for infrastructure projects in the US. However, they don’t necessarily affect job growth the same way in every market and have little direct effect on commercial real estate. It depends on money allocation and what projects get approved. Though it may make more sense to build a new bridge or tunnel on the East or West Coast, an infrastructure project in the Midwest could create more jobs for less money.
Infrastructure projects still require human participation, but those jobs aren’t permanent and tend to migrate often. Potential tax cuts and infrastructure spending could boost job growth, but the magnitude of the increase in the long term is debatable.
What would potentially have a more immediate and longer-term impact on job growth and the commercial real estate industry – and with little government spending required – would be looser mortgage lending requirements. Of course, such a change would most directly affect the homebuilding industry, but could also produce ripple effects in the commercial real estate industry, particularly the retail and industrial sectors.
Meanwhile, other proposed policy changes are likely to have an impact on commercial real estate, even if the effect on job growth is currently unclear. The two policies that have been in the news the most are the implementation of a border adjustment tax and elimination of the 1031 exchange program. The BAT proposal is for a 20 percent tax on imports and, in theory, would increase the value of the US dollar by 20 percent, therefore having no net impact on the consumer. In reality, we do not know how much the dollar will rise, if at all, due to a wide range of variables that affect exchange rates. A 20 percent import tax could result in less cargo at US ports and negatively impact both the retail and industrial markets, for example.
Proposed elimination of the 1031 exchange program would more directly affect commercial real estate, but not jobs. It could offset corporate and individual tax-rate reductions, as well as change depreciation schedules to allow full expensing of capital investment. Though the loss of the like-kind exchange could affect sales volumes in the smaller private client market, the full effect of eliminating the 1031 exchange is also unknown.
Job growth is undeniably a key indicator of the health of the US commercial real estate market. Given the uncertainty surrounding policy changes that could affect employment growth, that indicator may be a bit hard to read for some time.