COVID-19 Report: Metro Labor Markets and Multifamily Demand

State of the Economy

As of mid-May, the coronavirus pandemic has claimed more than 84,000 American lives — surpassing the deaths of U.S. soldiers in the Vietnam War — with approximately 1.4 million confirmed positive cases of infection across the country. Recent antibody tests in California, New York and Florida suggest that the rate of infection in the general population may be even higher than the official estimates, adding to the air of continued uncertainty and anxiety. Vaccines or proven therapeutics remain elusive, keeping a return to normalcy on shaky ground.

Necessary stay-at-home measures imposed across the 50 states to curb the spread of the virus have resulted in the shuttering of tens of thousands of main street businesses, especially those relying upon consumer spending, including retail, hospitality and local services. The impact of these closures on the U.S. economy is unprecedented. Due to the lockdown, 33.5 million people have filed for first-time unemployment benefits by early May. The April unemployment rate, which does not reflect the full extent of job losses, rose to 14.7% — the highest rate observed in the 72 years since the U.S. Bureau of Labor Statistics (BLS) started official tracking, marking a return to Depression-era estimates of joblessness.

City Renters Feel Greater Impacts

According to the Bureau of Economic Analysis, GDP declined at an annualized rate of 4.8% in the first quarter of 2020. However, the pandemic only started to have a meaningful effect on domestic output and consumption in the second half of March. The full weight of the lockdown will be visible in the second-quarter numbers, where forecasts have GDP falling by as much as 30%. How the U.S. economy recovers or slips into a protracted contraction will depend on a sequence of public policy decisions on sensible reopening across states based on solid public health considerations.

The fallout is most extreme in the country’s largest cities, which account for the lion’s share of the national labor market and economic activity. Based on data from the U.S. Department of Commerce, the 50 largest metro areas by population accounted for two-thirds of the GDP in 2018. Apartment renters, who are more likely to reside in or near cities, are disproportionately impacted when compared to homeowners.

Following up on our recent overview article on the impact of the pandemic on multifamily demand and operations, we take a closer look at the potential extent of this unfolding employment disruption across the largest U.S. metro areas. In this article, we further examine the share of multifamily renters and households most likely to be impacted by COVID-19 business closures over the medium term. We also look at the age and education profiles of these impacted renters.

State-Level Economic Impacts

Connecting the dots from the national to the metro level, we first take a look at the states hit the hardest by the surge in initial unemployment claims. The latest state-level weekly claims data shows the impact of this surge in terms of both the total volume of the cumulative initial claims and its relative impact on each state.

During this reporting period (March 21-April 25), California led the pack with 3.7 million cumulative initial claims, representing a share of around 13% of the 27.8 million claims filed nationwide (Chart 1). Pennsylvania, New York, Florida and Texas each saw increases of about 1.6 million claims. These top five states accounted for 36% of all U.S. claims, while altogether, the top 10, including Georgia, Michigan, Ohio, New Jersey and Washington, made up 56% of the total.

At the same time, the total volume of claims, which closely tracks GDP size, provides a partial view of the pandemic’s labor market impact. The insured unemployment rate, representing the share of overall current claims over the insurance covered employment, provides a clear picture of the relative hardship states are currently experiencing. Looking at the change in this rate from a week before the COVID-19 surge shows significant spikes across the country (Chart 2).

Vermont experienced the sharpest increase of 23.6 percentage points (pp), followed by Michigan (20 pp), West Virginia (19.8 pp), Nevada (18.5 pp) and Rhode Island (18.1 pp). Among the economic giants (where the state GDP > $1 trillion), New York was the hardest hit at 15.4 pp, followed by California at 8.5 pp. Texas and Florida show relatively muted change over this period.

These numbers provide a snapshot in time of a likely prolonged labor slump into the summer months. The initially reported uneven spikes across the country can be interpreted as a function of how soon different states enacted stay-at-home measures in March, in addition to the larger presence of business activities exposed to the impacts of reduced consumer spending. In a recent article, the BLS analyzed the vulnerability of state labor markets to COVID-19 based on their relative concentration of consumer-facing industries, similar to our overall risk assessment approach. The BLS analysis shows that states with a heavy reliance on tourism and hospitality, including Nevada, Florida, Hawaii and South Carolina, faced the highest risk from a protracted shutdown to deal with the pandemic.

The study also shows that lower-wage earners, who make up higher relative shares within these industries, will be affected the most by the pandemic. Florida is currently among states with the lowest spikes in the insured unemployment rate, which is likely due to its later lockdown date in the first week of April.

A clearer picture of the relative standing of states will emerge in the coming weeks as new data is made available. Additionally, the major limitation of the employment insurance data is that it does not capture the gig economy phenomenon, comprising independent contractors and part-time workers. In response, several states have recently begun modifying the claims process under the CARES Act to include these usually ineligible workers.

Renters With More Acute Economic Vulnerability

As states begin to reopen, unemployment claims are likely to settle down, but well above levels considered “normal.” The pandemic will dent consumer confidence even as measures are eased, which could have a more protracted and telling impact on the employment picture over the long term. Large cities, representing high concentrations of such activities, are likely to be hit the hardest, along with the rental housing market, which shelters the backbone of the urban labor force. Employing the risk assessment methodology discussed in our recent article, we examine the exposure of renters and households to this potential downturn across the largest U.S. metro areas.

We define high-risk North American Industry Classification System (NAICS) industries impacted by the pandemic to include retail trade, accommodation and food services, arts, entertainment and recreation, and other services. NAICS is the default standard used to categorize business data by type of activities.

The most recent U.S. Census Bureau American Community Survey housing data (2018) looks at the 50 largest U.S. metros by population. The overall apartment renter population employed in high-risk industries shows major entertainment and tourism destinations facing the prospect of large-scale disruptions. Las Vegas heads this list with demand from renters employed in these disrupted activities amounting to a nearly 45% share of all apartment renters (Chart 3). Orlando, Miami and San Diego, home to entertainment parks and beaches, similarly rank high on the list of large metros most vulnerable to apartment demand shocks, having 33% to 38% shares of impacted renters.

A Granular Look at Small Multifamily in Large Cities

Among the largest five U.S. metros, Los Angeles and Houston, with shares of around 30% impacted renters, are relatively more at risk compared to New York, Chicago and Dallas. San Jose, the tech capital of the world, is the least susceptible to these shocks, with only 20% of its apartment renters working in COVID-impacted industries.

These patterns are similar among the subset of renters living in small apartment buildings (Chart 4). Las Vegas again tops the list, reaching a slightly higher share of impacted renters at 48%, compared to the overall apartment renter population. Houston and Washington, D.C. show significant increases in shares of vulnerable renters for the small multifamily subset, while the shares of vulnerable renters for Los Angeles and New York remain similar across these apartment property types. Again, Bay Area renters and apartment demand show less vulnerability to consumer spending disruptions.

Job Stability of Household Heads

A more direct assessment of apartment demand vulnerability to the current COVID-19 shock looks at the number of household heads employed in these high-risk industries. The job stability of the household head is the most telling predictor of rental lease defaults. According to this measure, for the overall multifamily segment, Las Vegas is again the hardest hit, with 42% of leasing households coming under pandemic-induced stress, similar to the overall share of impacted renters (Chart 5).

On the other hand, while Orlando and Miami also appear high on this list, the share of impacted leases is slightly lower than their shares of renting workers in high-risk industries. Among the largest metros, apartment leases in New York, Chicago, Boston, Washington D.C., San Francisco and Philadelphia are relatively better insulated against potential shock, while Los Angeles and Houston rank higher in risk.

With a slightly higher rate of renter participation in retail and hospitality jobs, the share of small asset leases coming under pressure is one to two percentage points higher compared to the overall multifamily segment (Chart 6). However, in metro area vulnerability rankings remain broadly similar.

Age and Education Factor Into COVID-19 Impacts

For small apartment renters, labor force disruption from the pandemic will also likely play out differently across age groups and levels of attained education. Younger renters, and those with lower levels of education, typically form higher employment shares in the high-risk retail and hospitality jobs and will be disproportionately impacted.

Applying age cohort definitions we have used in recent articles, Millennials form half of all small asset renters working in industries likely impacted by the pandemic (Chart 7). This is significantly higher compared to their 35% representation in the overall U.S. working population. Gen Z renters make up 14% of small asset renters working in the impacted industries – twice their percentage of all U.S. workers.

With education, about two-thirds of all small multifamily renters vulnerable to the pandemic shock have attained high school or associate degrees, while another 14% did not graduate from high school. In other words, 80% of impacted small multifamily renters did not have college degrees. These numbers are significantly higher compared to the overall U.S. worker profile, where only 42% of workers did not have a college degree (Chart 8).

The economic impacts from the coronavirus pandemic on the multifamily sector vary not only across U.S. states and metro areas but also across socio-economic characteristics. In upcoming articles, we will focus further on these market specifics.