But Tight Office Vacancies in Top Cities Create Challenges
Small businesses that employ fewer than 50 people increased hiring nationally this month despite a 35-day federal government shutdown, a positive sign for owners of office property. But the jump wasn't enough to reverse an overall slowdown in job growth dating back to early 2017.
Faster-than-average growth has happened in specific areas of the country. Dallas/Fort Worth led major metropolitan areas in small business job growth, registering 2.65 percent for 12 months, according to the Paychex|IHS Markit Small Business Employment Watch’s monthly review of payroll data.
Dallas has shown gains for three consecutive months. Phoenix, St. Louis and Tampa, Florida, also showed faster small business employment growth while New York posted significantly slower gains.
Strong employment tends to mean increased demand for commercial office space, which has become increasingly challenging in cities where vacancy rates have tightened and new construction isn’t keeping up with demand.
Drawing on data from payroll company Paychex’s roughly 350,000 clients, the Paychex|IHS Markit’s small business jobs index increased 0.04 percent to 98.92. Anything below 100 indicates employment isn’t growing at the same rate as 2004, a year Jim Diffley, chief economist of analytics company IHS Markit, said was chosen as a benchmark because of the normal state of economic growth at that time.
An increase of 0.04 percent may not seem like much of a gain but the index has been falling since peaking in April 2014 at 101.26. The index dropped below 100 in June 2017 after an almost six-year run above 100.
Diffley said small business job growth outpaced large companies for those years. Once large companies built up steam and started hiring more, the job market tightened and created hiring challenges for small business. “Small business has not kept up” with the employment growth rate of large companies, Diffley said.
There have been previous upticks along the downward path. Whether or not this month’s increase sticks remains a question. Year-over-year, the index is down almost 1 percent.
For now, Dallas sits at the top of the index with 102.94, followed by Phoenix, St. Louis, Denver and Tampa just above 100.
The Dallas area’s small business job growth comes as the office market has tightened. Vacancy is at 15 percent, according to CoStar data
. Finding space for small businesses to expand has become a juggling act for them as well as landlords, said Sara Terry, senior vice president for Stream Realty in Dallas.
Business with 50 or fewer employees tend to need 3,000-15,000 square feet of office space. The challenge has become whether a business can expand in its existing building or find "options where they can get in quickly” Terry said.
She said the energy sector has been a big driver small business growth. But also given the amount private wealth in Dallas, she said small businesses such as financial services keep springing up or expanding.
Office vacancy is even tighter in the other cities. Phoenix
is at 12.5 percent vacancy. Denver
follows at just over 10 percent vacancy. Tampa
sits at 7.3 percent. And St. Louis
is the tightest at 7 percent.
Rental rates have been rising as a result, which pushes up the cost of expansion. “A tenant may be doubling in size but more than doubling their rent obligation,” Terry said.
Richard Lawson | Costar Research Group
February 1, 2019