2018 Job Growth Closes on a High Note, Tight Unemployment to Restrain Hiring

 

EMPLOYMENT

JANUARY 2019

2018 Job Growth Closes on a High Note, Tight Unemployment to Restrain Hiring

Aggressive recruiting accelerates employment growth in 2018, raising housing demand and consumer spending. The economy added 312,000 positions in December for an annual total of 2.6 million new roles, outperforming both 2016 and 2017. Unemployment fell to a half-century low. Employers sustained a higher rate of hiring amid a tighter labor market in part because they filled positions with less-experienced candidates and provided more training to cover the skill gap. A broader range of people finding full-time employment is, in turn, increasing housing demand. Much of that is going toward more affordable multifamily options, supporting a 12 percent rise in apartment absorption in 2018. Some firms are also raising wages to attract the best talent as average hourly earnings appreciated 3.2 percent last year. Greater take-home pay is increasing retail consumption and consumer spending, and sales over the most recent holiday shopping season improved by the largest margin in six years. Travel spending within the U.S. is up as well, contributing to the best year for hotel occupancy on record dating back to 1988.

Favorable outlook for 2019 despite potential headwinds. The new year begins with positive momentum from the jobs market but a low unemployment rate will add mounting pressure to recruiters. Many small businesses continue to report difficulty in finding qualified workers as their most pressing business dilemma. Another challenge is increased inflation risk from rising wages and tariffs that could force the Federal Reserve to tap the brakes on economic growth. Despite these headwinds, job additions will remain in the 2 million range, sustaining commercial real estate demand. Further hiring will underpin positive rental activity, keeping apartment vacancy comfortably below 5 percent. Among retail properties, availability will fall to a near-two-decade low, supported by a moderated construction pipeline.

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Developing Trends

Labor force participation rises at end of year. The unemployment rate ticked up 20 basis points to 3.9 percent in December as more people re-entered the labor force. Many are starting new positions, but others have just begun the job search.

Higher construction wages impacting development. Among the sectors raising pay is the construction industry. The 3.9 percent increase in average hourly earnings helped employers hire 280,000 personnel in 2018, about 30,000 more people than last year. Rising construction costs will weigh on the pace of development and renovation.

Healthcare hiring speeds up as new medical facilities open. Healthcare payrolls grew by 346,000 personnel in 2018, mainly for ambulatory services. There is a growing need for such employees at outpatient facilities and urgent care centers, increasingly important tenants for shopping centers.

312,000

Jobs Added in December 2018

3.9%

Unemployment Rate in December 2018

Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; RealPage, Inc.; STR Inc.

 

Extremely Tight Unemployment Among College-Educated Strengthens Demand For High-End Apartments

 

 

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Research Brief
October 2018
EMPLOYMENT
Developing Trends
Year-to-date job growth outperforms last year’s comparison. In September, 134,000 jobs were filled, bringing the total expansion of the employee base for the year up to 1.9 million people. That is 180,000 more jobs than were added in the same time period in 2017.
Job opening and applicant gap widens. The latest data show there are 7.1 million job openings, above the 6.0 million people who are seeking jobs. The gap is even wider among professions commonly requiring college degrees. In August there were 2.6 million job openings in professional, business and healthcare services, versus 1.2 million people looking for jobs.
Falling unemployment driving Class C apartment demand. As the employee base has grown for nine years, so has demand for workforce housing. Class C apartment vacancy has dropped 570 basis points to 3.7 percent in the third quarter from its 2010 peak of 9.4 percent, when unemployment was 9.9 percent. The average Class C rent has risen 35 percent to $1,016 per month since 2010.
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Extremely Tight Unemployment Among College-Educated Strengthens Demand For High-End Apartments
Unemployment continues to decline, including for those with a degree. The number of unemployed people in the U.S. fell by 270,000 last month to just under 6 million. The last time fewer people looked for work was in December 2000. Last month’s job growth pushed down the unemployment rate 20 basis points to 3.7 percent from the previous month. For those with a four-year college degree, the rate dropped 10 basis points to 2.0 percent, its lowest level since 2007.

Extremely low unemployment among the college-educated bolsters high-end apartment demand. The growth of jobs requiring a college education typically bodes well for multifamily properties, particularly higher-quality Class A and B apartments. Over the past two decades when the unemployment rate for those with college degrees fell to this month’s level, the vacancy rate for Class A apartments also tended to drop below 5 percent.

This trend occurred again in the third quarter, as vacancy for Class A apartments slid to 4.7 percent in September, a five-year low.

Luxury apartment availability may decline even further going forward. The high-skill labor shortage is pushing college-degree wages higher, impacting apartment demand. In the past four quarters, the median weekly earnings for an employee with a bachelor’s degree or higher improved 5.3 percent, well above the 0.4 percent rate of appreciation posted in the previous annual period. Though wages for this niche are rising, homeownership for these professionals remains limited. Higher interest rates are increasing the cost of home payments, adding appeal to apartments. Younger professionals often prefer the flexibility of renting and are partial to living in popular neighborhoods with high-end amenities, underscoring demand for luxury units.

134,000 Jobs Added in September 2018 3.7% Unemployment Rate in September 2018
* Job openings through August; Unemployed through September
Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; RealPage, Inc.
The Research Brief blog from Marcus & Millichap offers timely insight and expertise into the rapidly changing investment real-estate industry. The Research Brief is published by top industry professionals, showcasing time-sensitive information and valuable analysis. Add the Research Brief blog to your reading list today.
The information contained herein was obtained from sources deemed reliable. Every effort was made to obtain complete and accurate information; however, no representation, warranty or guarantee to the accuracy, express or implied, is made.
Marcus & Millichap is a service mark of Marcus & Millichap Real Estate Investment Services, Inc.
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Stock Market Volatility Up Amid Rising Interest Rates; Stability of Commercial Real Estate Holds Appeal

 

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Research Brief
October 2018
STOCK MARKET
Developing Trends
Fed remains committed to tightening. Recent comments from the Fed remain hawkish, with a rate hike planned for December and as many as three next year. Core PCE (personal consumption expenditure), the Fed’s preferred inflationary metric, remained at 2 percent in August, matching the Fed’s objective for core inflation.
Unemployment hits lowest rate in nearly 50 years. The September jobs report highlighted a slowdown in overall additions yet posted an unemployment rate of 3.7 percent, marking the lowest rate since 1969. Additionally, job openings recently totaled 7.1 million in August, while the number of people looking for work totaled just 6 million in September.
Commercial leases align with rising inflation. Over the past 12 months, Core CPI has risen 50 basis points to 2.2 percent as economic strength filters into prices. As inflationary pressure builds, many commercial real estate leases have built-in inflation adjustments and lease resets in order to help investors deflect rising expenses for operating the asset, ensuring a more stable return profile.
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Stock Market Volatility Up Amid Rising Interest Rates; Stability of Commercial Real Estate Holds Appeal
Rising interest rates, midterm elections spark stock market volatility. The stock market has fallen roughly 10 percent from its record high reached in early October, while suffering its second-largest single-day decline of the year on Wednesday, Oct. 10. Simultaneously, the S&P Volatility Index (VIX) remains elevated, highlighting continued nervousness among market participants. The stock market correction was precipitated by a quick move in longterm interest rates, carrying the 10-year Treasury yield to 3.25 percent from a prior trading range of 2.85 to 3.05 percent. Lingering concerns over the future of interest rates and uncertainty surrounding the midterm elections remain a significant contributor to market volatility.

Interest rate move has potential to impact the economy.
As lenders and borrowers adjust to the effects of higher debt costs, the potential for credit-related stress among heavily indebted companies increases, raising the prospect of additional volatility in upcoming months.
However, percolating wage growth, stable inflation and the lowest unemployment rate in nearly 50 years highlight a robust economy, evidenced by third quarter GDP reaching 3.5 percent. Meanwhile, volatility remains a key feature of equity markets, encouraging investors to hold a diversified portfolio to reduce the impact on their holdings.

Stability of commercial real estate increasingly appealing for investors. Carrying competitive yields and relatively less volatility, commercial real estate represents a viable alternative to equities. Additionally, property values typically reflect the economic strength of the real economy, underpinned by low unemployment, positive demographics and continued growth in consumer spending, reinforcing a healthy outlook for the coming year. The economic recovery has tightened vacancy significantly across all major property types, while construction balanced with demand has prompted considerable growth in rental rates.

80% Rise in the VIX from Oct. 8 to Oct. 12 1,300 Dow Point Drop from Oct. 10 to Oct. 11
* Through Oct. 12
Sources: Marcus & Millichap Research Services; Moody’s Analytics; Federal Reserve Economic Database; Bureau of Labor Statistics
The Research Brief blog from Marcus & Millichap offers timely insight and expertise into the rapidly changing investment real-estate industry. The Research Brief is published by top industry professionals, showcasing time-sensitive information and valuable analysis. Add The Research Brief blog to your reading list today.
The information contained herein was obtained from sources deemed reliable. Every effort was made to obtain complete and accurate information; however, no representation, warranty or guarantee to the accuracy, express or implied, is made.
Marcus & Millichap is a service mark of Marcus & Millichap Real Estate Investment Services, Inc.
© 2018 Marcus & Millichap. All Rights Reserved.
23975 Park Sorrento | Suite 400 | Calabasas, CA 91302 | Telephone: (818) 212-2250

 

Affordability Slows Home Sales, Turning Rising Residential Demand Toward Apartments

 

 

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Research Brief
October 2018
HOUSING
Developing Trends
Despite lowering apartment vacancy, tightened construction lending has led to a tapering in multifamily permitting issuance, while single-family permitting also remains low. A slowdown in housing construction will be met with heightened residential demand and could lead to a shortage of stock if the economy remains strong.
The spread between owning and renting will weigh on single-family sales as the monthly mortgage payment for a median-priced home is now $339 more than the average monthly rent for an apartment, the highest spread since 2008.
New-home sales peaked in November 2017 and have fallen 11.7 percent since that time. Sales of assets above $300,000 shrank as a percentage of total new-home sales, contributing to the median price of a new home rising more slowly over the past 12 months, reaching $320,200 in August, a year-over-year gain of 1.9 percent.
Population and household growth are anticipated to grow faster in the suburbs versus urban core areas through 2025. Apartment vacancy in suburban areas peaked in 2010 at more than 7 percent but has recently tightened below 4.5 percent, resting slightly above the vacancy rate in downtown areas.
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Affordability Slows Home Sales, Turning Rising Residential Demand Toward Apartments
Though mortgage interest rates remain historically low, the average 30-year fixed rate reached its highest level since 2011. Rising mortgage rates in conjunction with home values that have appreciated more than 64 percent over the same time period are discouraging many potential homeowners from making offers due to their inability to afford mortgage payments. Because of the rising costs, the pace of sales has declined each month since March. The increasing costs of homeownership, as well as changes to tax laws that removed some advantages to own, will continue to weigh on home sales activity this year.

The nation’s single-family housing market appears to be at a stalemate. Listings of single-family homes remain flat year over year, and new-home construction has slowed due to reduced demand. Sales of newly constructed residences remain concentrated in higher price tranches, squeezing first-time homebuyers out of the market. In addition, existing home sales among first-time buyers was 31 percent during August, remaining below the 40-plus percent

that was typical prior to the recession. First-time buyer activity will remain constrained as many current homeowners who are locked into low-interest-rate loans elect not to list would-be entry-level homes. Single-family homebuilders are also unable to fill the need as elevated land and materials costs, which have been impacted by tariffs, make it difficult to construct starter homes.

Strong job growth is sparking household formation, but demand is concentrated in apartments. The result has been tightening multifamily vacancy despite elevated completions. Nationally, nearly 82,900 units were constructed in the third quarter, but the positive absorption of more than 107,000 units pushed down the third quarter apartment vacancy rate 40 basis points from the previous quarter to 4.2 percent, the lowest level since 2001. Shifting dynamics in the single-family market will continue to benefit apartments through the remainder of 2018, as the year-to-date positive net absorption of units is on track to reach the highest level since 2010.

$267,300 Median price of existing single-family home in August 2018 4.3 Months of supply at current sales pace in August 2018
*Through August
Sources: Marcus & Millichap Research Services; Freddie Mac; National Association of Realtors; RealPage, Inc.; U.S. Census Bureau
The Research Brief blog from Marcus & Millichap offers timely insight and expertise into the rapidly changing investment real-estate industry. The Research Brief is published by top industry professionals, showcasing time-sensitive information and valuable analysis. Add The Research Brief blog to your reading list today.
The information contained herein was obtained from sources deemed reliable. Every effort was made to obtain complete and accurate information; however, no representation, warranty or guarantee to the accuracy, express or implied, is made.
Marcus & Millichap is a service mark of Marcus & Millichap Real Estate Investment Services, Inc.
© 2018 Marcus & Millichap. All Rights Reserved.
23975 Park Sorrento | Suite 400 | Calabasas, CA 91302 | Telephone: (818) 212-2250