It makes sense that the nation’s job market affects the fortunes of the real estate industry. The more jobs there are, and the better companies are doing and the better real estate does. This is the same on a national level as it is in a state like New York. The commercial real estate industry is affected perhaps even more, as the growth or lack of growth of businesses directly influences their ability to buy and sell real estate. So how does this play out?
Job creation is always a boon for commercial real estate, as success most often necessitates a larger space: as companies expand, they seek more office space, bigger buildings, and better locations. Companies expand in order to offer locations near their client base, but these types of moves can only occur if the job market is favorable and companies seeking employees have an incentive to seek more space.
Commercial real estate in New York has fallen into somewhat of a downward spiral in recent years as the economic recession impacted the real estate sector. Primary among these effects was an increased number of bankruptcies and foreclosures. For those still able to afford to purchase real estate this was a positive development; properties located in prime areas suddenly became available at substantially reduced rates as commercial value went down. Additionally, depressed mortgage rates for new buyers (as well as for existing property owners looking to refinance) reduced costs even more. For companies already feeling the effects of the recession, however, this was salt in the wound: the little property value they had decreased even more, and any assets tied to property value dwindled.
Between 2008 and 2009, New York City’s private sector lost about 100,000 jobs. The entertainment, tourism, advertising, financial services, media, and professional services sectors were all affected. The Class A office vacancy rate three years ago was over 12%, the highest it had been in 12 years.
General real estate constitutes about 10% of the total economic output of the U.S. When the economy suffers a severe downturn, this creates a financially adverse domino effect. Because real estate affects the job market, particularly in the construction and realty industries, a failing real estate market contributes to unemployment. Unemployment in turn indicates a lack of job availability for organizations, which means they are less likely to buy commercial real estate. But has this trend changed as the economy has begun to stabilize?
Some would argue that New York is in better shape to address these issues than it was 30 years ago. The federal government has worked together with banking institutions to help prevent unavoidable recessions from spiraling into depressions. The New York City mayor is committed to make sure that New York continues to develop a diversified economy, and the city’s Economic Development Council helps entrepreneurs and small business owners create new jobs and contribute to the economy in a positive way.
Recent job growth has encouraged businesses to seek to rent commercial space and the National Association of Realtors believes this trend will continue in upcoming years. Vacancy rates are falling while leasing and renting become more popular; as opposed to a few years ago, New York has the second lowest commercial vacancy levels in the nation. Businesses are experiencing growth again and are requiring additional space. Whether this is the result of an expansion, new job openings, or the identification of suitable properties at reasonable prices, jobs are inevitably created as the economy improves. And as jobs are created, commercial real estate agents start to smile.
Karl Stockton frequently writes on real estate, investment, finance and current events.