How Does a Resilient Job Market Affect Multifamily?
Last week, the Bureau of Labor Statistics reported 236,000 jobs added to U.S. payrolls in March, which, while lower than economists had expected, is still indicative of the resilience of the labor market. Unemployment remained at a historically low 3.5%. What does this mean for commercial real estate (CRE), and multifamily in particular?
Our perspective: By most measures, job growth is a good thing for CRE. Job creation has historically gone hand-in-hand with the need for real estate. For example, if an information technology company decides to put down roots in Charlotte, North Carolina, they might need to rent office space, and they’ll hire workers who would need to live locally, potentially increasing multifamily demand. This increase in employment stimulates economic growth, which in turn creates the potential need for real estate of all types. A population with plenty of employment options gives greater power to consumers, generally creating more need for restaurants, retail space and industrial warehouses for e-commerce.
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Last week, the Bureau of Labor Statistics reported 236,000 jobs added to U.S. payrolls in March, which, while lower than economists had expected, is still indicative of the resilience of the labor market. Unemployment remained at a historically low 3.5%. What does this mean for commercial real estate (CRE), and multifamily in particular?
Our perspective: By most measures, job growth is a good thing for CRE. Job creation has historically gone hand-in-hand with the need for real estate. For example, if an information technology company decides to put down roots in Charlotte, North Carolina, they might need to rent office space, and they’ll hire workers who would need to live locally, potentially increasing multifamily demand. This increase in employment stimulates economic growth, which in turn creates the potential need for real estate of all types. A population with plenty of employment options gives greater power to consumers, generally creating more need for restaurants, retail space and industrial warehouses for e-commerce.
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Of particular interest to CONTI Capital is the close relationship between job creation and demand for apartments. Labor market durability is a major component of the performance indicators we track when we are evaluating submarkets and zip codes for potential multifamily acquisitions. Apartments in areas with good job prospects are more likely to perform well, historical data indicates.
There is one major grain of salt in all of this good news, though. The Federal Reserve has been on a campaign to quell elevated inflation for over a year now, and they aim to do this through increases in the federal funds rate. Despite the recent slowdown in payroll growth, the continued churn of job opportunities might still signal to the Fed that they haven’t gone far enough in their quest to cool the economy. We assume the Fed is concerned that the stout labor market is contributing to a “wage-price spiral,” whereby growing wages are pushing upwards on prices, and so capping inflation necessarily includes putting a damper on the labor market.1
The increasing funds rate is increasing the cost of borrowing, which is having a chilling effect on CRE. Additionally, as has been reported for months now, the rate hikes could possibly send the economy into a downturn. If this occurs, it’s likely that demand for commercial real estate, including multifamily, would feel some negative effects. However, historical data tells us that multifamily real estate is more adaptable in times of economic uncertainty relative to other CRE types. Not to mention, recent labor market performance is a good sign that any economic downturn would probably not be all that severe or long-lasting.
We think job growth needs to fall to about 100,000 in payroll growth per month, or less, for the Fed to perhaps feel comfortable enough to cease rate hikes. That is the level at which job creation matches current population growth.
In our view, the resilience of the labor market is a positive – not only does job creation correlate with demand for real estate, but the continued strength of the labor market gives us confidence that the U.S. can probably weather the anticipated economic slowdown with limited fallout.