Why flat initial jobless claims are good news for mall REITs

Market Realist

Initial jobless claims increased to 329,000 for the week ended January 17

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. Aside from the Hurricane Sandy–influenced spike in late October, initial jobless claims had 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 exit the holiday distortion period

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 as the mortgage business dries up. Also, as we saw from the Challenger and Gray Job Cut announcement, the defense and retail sectors are laying people off to reduce costs.

We’ll see if Washington does something to extend emergency unemployment benefits that expired on January 1. If not, expect to see the unemployment rate fall, but don’t read too much into it.

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 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 that inflection point.

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