By Gil Medina, Executive Managing Director, New Jersey Operations, Cushman & Wakefield, Inc.
Considering the direct correlation of the economy, the unemployment rate and commercial real estate, New Jersey’s less-than-desirable office and industrial performance heading into the second half of 2009 comes as no surprise. Still, we are beginning to feel better about the economy, so when will the same hold true for our industry?
Like employment growth, the performance of real estate is a lagging indicator; therefore, history would suggest that we have some way to go before we see a recovery across market segments. Real estate, at its core, houses human activity – people living, working and shopping. Consumers buy new houses and shop at malls, blue collar professionals go to warehouse/distribution and manufacturing operations to work, and white collar employees commute to office buildings.
When companies are compelled to shed workers and downsize, it impacts all real estate types. Consider this: To simply keep up with population and workforce growth, the U.S. economy must create 100,000 jobs per month. The country has lost more than 100,000 per month since February 2008, taking a sharp fall to 321,000 lost jobs in September 2008 and peaking at 741,000 lost jobs in January of this year.
These numbers fall in line with the findings of the C-Suite Survey – an initiative coordinated and sponsored by Cushman & Wakefield along with Rutgers University, the New Jersey Chamber of Commerce and six major trade associations. The survey asks senior executives in the state questions about the economy and the business climate. In May/June 2008, only 10.7 percent of survey respondents felt that the recession was “severe.” By October/November 2008, that figure jumped to 54.5 percent.
As previously stated, employment, like real estate, is a lagging indicator. The natural tendency for employers is to avoid layoffs because they recognize that assembling a strong workforce is not an easy task. Yet as managers understood length and the depth of the current recession, they began to aggressively trim their workforce.
Real estate decisions are subject to more constraints such as leases and other agreements. Initially, companies will seek to maintain the status quo or to reduce space as soon as feasible. Major changes normally cannot be implemented until a lease expires or property is sold. As an indicator, real estate, therefore, lags even more than employment. And just as responses to a recession are slow to begin, positive responses (payroll increase, greater space utilization), trail on the recovery side as well.
Monthly job losses are becoming smaller and smaller. In May 2009, the U.S. numbers mirrored last September’s. Following a rapid contraction in the Fall of 2008, the employment curve is showing a consistent upward trend. I anticipate that by year-end, we will be at zero job losses or, possibly, in the realm of net job growth. Consistent with my view that the real estate market trails employment, we should begin to see signs of a recovery in the real estate markets the first quarter of 2010.
Many in our industry harbor are awaiting a shakeout in the commercial real estate market comparable to the one in the housing market. But we need to place the two in perspective. At the peak of the housing market in the U.S. our housing stock was worth approximately $21 trillion, and much of it was secured with loan-to-value ratios from 80 to 100 percent.
Commercial real estate (CRE) in the U.S. is valued at approximately $6.5 trillion and is financed with about $3.1 trillion in debt. While the housing crash had a catastrophic impact on the economy, I do not believe that a shakeout in CRE will be as dramatic because the market is so much smaller – and the debt is so much smaller.
To place New Jersey in perspective, our state is seeing trends comparable to national performance. June unemployment rate reflected a 0.4 percentage point increase, to 9.2 percent, yet remains below the national rate of 9.5 percent. During this decade, New Jersey’s economy has performed sub-optimally in comparison to its historical performance. That is one of the reasons that our commercial real estate market has remained relatively stagnant.
We can realistically hope to see robust employment growth as the economic expansion takes hold. But our government and policymakers will need to make a major effort to dramatically improve New Jersey’s business climate. We need to end the state’s war on wealth and the wealthy. To date it has contributed little other than the out-migration of both and disinvestment in our state.
The Site Remediation Reform Act will present many challenges (and opportunities) as the regulated community begins to navigate the new site remediation landscape in New Jersey. Buyers, sellers, and other interested parties are urged to exercise continued caution when negotiating agreements concerning contaminated properties in New Jersey.
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