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Job Growth is Needed for a Commercial Real Estate Recovery in 2011

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If there is a silver bullet for the rebound of South Florida’s commercial real estate market, it is the creation of new jobs that comes with economic growth. The current reluctance among businesses to hire translates into flat demand for space in office buildings, shopping centers, warehouses, distribution centers and any other type of commercial real estate product that is directly linked to economic growth. The real estate recovery is inextricably linked to jobs.

The good news is that despite persistent unemployment there are reasons for optimism in 2011. Demand for Class A office properties is strong, thanks to interest from high net worth individuals and institutions that take a long view of a property’s worth. Net absorption in 2010 for the overall South Florida office market was positive and vacancy rates declined as rents decreased.  For properties that are less than institutional grade, more lenders are opting to work things out with good borrowers, rather than taking properties back.  The net effect is an overall sense that the market has stabilized.

The not-so-good news for South Florida is that industry watchers expect more pain this year as substantial debt comes due on commercial properties and supply in this region continues to exceed demand. While major cities such as New York and San Francisco have seen a decrease in vacancies and an increase in rents over the past year thanks to the resurgence of the financial and technology sectors, Florida cities have not shared in this good fortune. Rather, Florida’s economy remains disproportionately dependent on the service sector, which is captive to the job slump.

Although recent employment data shows job creation rather than continuing job losses, the net number of new people in the workplace needs to rise before increased employment can generate a truly positive impact on the office, retail, multifamily and other commercial property types.  Meanwhile, the pace of deals has accelerated and there is substantial capital on the sidelines looking for real value.  When combined with low interest rates, these are the core ingredients of a turnaround.  All that’s missing now is real job growth.

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