Why falling initial jobless claims are good for commercial REITs
Initial jobless claims decreased to 319,000 for the week ended May 2
Initial jobless claims are one of the few labor market indicators released every week. Unemployment is a profound driver of economic growth, and persistent unemployment has been the Achilles’ heel of this recovery. While it seems like the big layoffs are largely finished, firms are still reluctant to add staff aggressively. Initial jobless claims have been holding steady in the 340,000-to-380,000 range.
Historically, real estate prices have tracked very closely with incomes. In fact, up until the real estate bubble burst, the ratio of median home price to median income remained in a relatively tight range of 3.2x to 3.6x. So if unemployment is rising, there’s little upward pressure on wages, which tends to be negative for home prices. Plus, the unemployed are unable to qualify for a mortgage, so the pool of buyers shrinks.
Initial jobless claims are trending back down again
We recently had a sub-300,000 print on initial jobless claims this year, which was the lowest since May 2007. This large level seems to be an aberration, showing the hiring fluctuation that usually goes on around the holidays. That said, the financial industry is laying people off with the mortgage business drying up. Also, we saw from Challenger, Gray and Christmas’ job cut announcement that the defense and retail sectors are laying people off to reduce costs.
Impact on commercial REITs
We’ve been starting to see the consumer wake up and begin to spend. In particular, the luxury end of the retailing sector seems to be performing the best. This is good news for mall REITs like Simon Property Group (SPG), General Growth Properties (GGP), CBL and Associates (CBL), and Taubman (TCO), as well as the Vanguard REIT ETF (VNQ).
Generally, recessions end when the consumer finally begins to spend, and often it’s out of necessity, not desire. Eventually, the clothes wear out and the 12-year-old car becomes too expensive to keep fixing. We have a tremendous amount of pent-up demand in the U.S. right now, and it appears we may be at the inflection point.
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