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Date: October 10, 2017
Category: Real Estate

Does Job Growth Predict Rent Growth?

rental growth employment growth correlationIn the depths of the Great Recession, Americans faced lost income, devastated safety nets, evaporated retirement accounts, and underwater mortgages. Many lost their tenuous hold on the “American Dream,” and have spent the better part of the last decade trying to reclaim it.

Those who went belly up on their mortgages were forced into renting apartments. Increased demand spurred rising rents, and today nearly 12 million households spend more than 50 percent of their gross income on rent.1

The job market has steadily improved since the double-digit unemployment of late 2009. Today, unemployment has reached a 16-year low.2 However, while people are finding employment, lower wage growth highlights the recovery’s weakness.

Millennials with high student loan debt are in entry level jobs that barely cover the bills. Many laborers have had to transform their skills to find employment in today’s innovative economy, while mid-to-senior level employees have struggled to regain the salaries they lost.

Today’s job growth is bringing new renters into the mix, while tepid wage growth is also keeping current renters in apartments as they work to build back the financial security they lost following the Recession.

Using job growth to forecast rent growth

Apartment rents have climbed 5 percent to 10 percent in some markets over the last few years.3 And while it’s easy to play Monday Morning investor with markets that have delivered solid returns, it’s more difficult to forecast tomorrow’s investment opportunities.

Here’s what the apartment market’s recent success may tell you. Job growth has been a relatively good predictor of future apartment investment performance. As more young people find their first jobs, they move from their childhood bedroom to their own apartment. As the typical American worker finds work, he or she can move their family out of the in-laws and into their own two-bedroom unit.

Other than Pittsburgh, which beat the national average in apartment rent growth despite having the lowest employment growth from 2011-2016, the other four low-job-growth markets lagged below the U.S. rent growth average. The other four cities shouldn’t surprise you, as they have all struggled to adjust to today’s technological revolution.

On the other side, the top five markets for employment growth all beat the U.S. average for rent growth from 2011-2016. It wasn’t a perfect correlation, but in general, job growth drove higher-than-average rent growth.

employment growth and rent growth of top five and bottom five markets

 

Look at the big picture

Historically, big jobs announcements centered on the opening or closing of a plant. These events immediately moved the needle on nearby rental assets. Today, however, job growth is just one of many factors.

Ask yourself, “How are wages moving?” “What does the average household earn?” Jobs are a good start, but with a deep hole from the Recession to fill, households need to bank on well-paying jobs to both pay their bills and replenish their savings accounts.

Also, don’t forget to look at apartment supply. Many high-growth metros are secondary markets with healthy suburban sprawl. An entry-level Millennial may not be able to afford a unit in the heart of Austin, but may be able to find an affordable unit outside the city limits in Round Rock.

So, while it’s not all about “jobs, jobs, jobs …” it certainly is a great place to start for investors looking for investment opportunities in today’s multifamily market.

1 Smart Asset. The Most and Least Severely Housing Cost-burdened Cities. 4/12/16.

2 Bureau of Labor Statistics. Unemployment Rate. 8/28/17.

3 Reis. Job Growth Can be a Good Predictor of Rent Growth. 3/17.

This information is educational in nature and does not constitute a financial promotion, investment advice, or an inducement or incitement to participate in any product, offering or investment. It is not intended to be used as a tool to determine your specific financial situation, tax status, investment objectives, investment experience, suitability for any specific investment, risk tolerance or investment profile. Resource is not adopting, making a recommendation for or endorsing any investment strategy or particular security.

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