As jobs go, so does commercial real estate...
"The ultimate resource is people – skilled, spirited, and hopeful people who will exert their wills and imaginations for their own benefit and inevitably benefit the rest of us as well." – Julian Simon
You cannot do commercial real estate market analysis without looking at the underlying fundamentals that drive growth: jobs. Jobs create population growth and population growth drives disposable income and spending, each of which have real world applications for real estate demand. Yet not all jobs are created equal, at least in terms of economic growth and prosperity. In economic base analysis, we separate jobs into two categories: basic (export) jobs and non-basic (service) jobs. The idea is that basic jobs export goods and services, bringing in new dollars vital to an area's economic vitality (think manufacturing). Non-basic jobs help service the local population, but do little to bring in new monies (think teachers, police, etc). Basic jobs have a multiplying effect on a community, because for every basic-export job, there are several service related jobs that must be created. As jobs are created, populations increase along with spending.
The Portland metro area is the main driver of the state's overall economic activity and has several basic job categories as follows:
Professional and Business Services
These four "supersectors" are the main drivers of economic growth in the region. Digging further into the subsectors, we begin to understand that computer and electronics manufacturing (Intel), construction services (Hoffman, Skanska, etc), and machinery manufacturing.
Overall, unemployment remains historically low at 4.2% mirroring overall unemployment in the state.
Let's take a look at our basic export sectors and their growth:
Employment growth had a resurgence during the Covid crisis as many overseas manufacturers shuttered factories and supply chain distruption caused chaos. Many local companies helped to fill those gaps with increased production and hirings. Unfortunately, now with many companies, including Intel, facing increasing costs and lowered demand, we are seeing job losses in those particular industries. Intel recently announced layoffs at their California facilities with more expected.
The information supersector includes industries such as software publishers, telecommunications, and other publishing industries. These sectors have also seen growth since the beginning of June 2020, however is now seeing a pullback in jobs and hiring. This could affect office demand even further.
Professional and business services have been experiencing steady growth since 2010. Despite the job losses during the pandemic, the industry has regained all of the lost jobs and continued on a similar upward trajectory. This is helpful, although not comforting, for office assets as most of these jobs are office users. We believe Portland's proximity to major west coast markets and relatively affordable cost of living, should help continue to bolster these jobs.
Lastly is construction...
Construction is a seasonal business and highly correlated to the overall economy, although it's movements typically lag the business cycle by a bit. Construction continues on projects while markets move and not until projects reach completion do we see the real overall effects. Anecdotally through conversations, it appears as though the backlog of construction projects is beginning to filter out and companies are beginning to ask, what's the next project? This could put strain on the sector and we'll see how that plays out in the next few quarters of the year. We anticipate increasing job losses in this sector as the year progresses and into 2024.
It's imperative to watch these sectors as the overall US economy begins to slow down this year. Industrial real estate has remained strong with e-commerce demand fueling an under-supply. Office has been a different story with high vacancy rates from work-from-home policies and stagnant demand. Information and Professional and Business Services feed the office sector and we have seen demand in the suburbs. The downtown CBD area is another story and has issues beyond economics. The takeaway here is that you should understand the overall economic drivers in the region and how that affects commercial real estate demand.