Markets Unnerved by Unemployment

Unemployment was up at the end of last week and investors didn’t seem to like that, sending the Dow Jones index down on Friday by 143.28 points, or about 1.64 percent. The S&P 500 lost even more ground, 2.13 percent, as did the Nasdaq, which was down 2.81 percent. Now that December’s job-loss numbers from the U.S. Department of Labor are in–524,000 during the last month of the year–it seems a grand total of 2.6 million Americans lost their jobs during 2008. A good many headlines blared that the last time job loss numbers were that bad was in 1945, but the comparison really doesn’t hold much water, since the U.S. population and economy were a lot smaller 60-plus years ago than they are now. Some estimates put the job-loss percentage in 1945 at a whopping 6.6 percent; once the Axis was defeated, a lot of jobs became unnecessary. Still, no one is pleased by current job losses, which total roughly 2 percent of the total existing jobs a year ago. According to the Labor Department, the unemployment rate reached 7.2 percent in December, up from 6.7 percent in November. Various prognosticators say that the rate has a lot higher to go, but how high is still anyone’s guess. To reach the milestone marked Really Bad Recession, the rate would need to above 10 percent (which it did in 1982), and to reach the level of Your Grandfather’s Depression, it would have to approach 25 percent (as it did in 1932). Higher unemployment’s most immediate impact on commercial real estate seems to be on the retail sector, but it won’t be long before office properties are adversely affected as well. Thus both office landlords and tenants are doing what they can currently to batten down the hatches.”We’ve seen a greater emphasis in the past two quarters on early renewals of office leases,” Daniel Miranda, president of Chicago-based HSA Commercial Real Estate, told CPN. “Owners want to secure cash flow beyond the next three years, and tenants want to take advantage of the current tenant-favorable market.” He added that “most owners are reacquainting themselves with the traditional valuation of office buildings as the sum of the in-place cash flow. Underwriting based upon the hope for a future sale based on lower, or even stable, exit cap rates is long gone.” One silver lining for owners of existing properties is that this time around, when the time comes for a recovery, an excess of office space won’t act as a drag on the market. “New development is under extreme pressure from the combination of very conservative financial underwriting combined with many tenant precommitments for space unwinding,” noted Miranda.