Is Job Growth a Good Predictor for Rent Growth?
The multifamily market has arguably been the highest performing asset class of any over the last few years. Apartment rents have climbed 5% to 10% in some markets. Cap rates are at their lowest as investors have poured billions into owning these properties.
These investors, both domestic and global, have been drawn to “gateway” markets more so than others. These include New York, San Francisco, Los Angeles, Boston, Miami, Dallas, Houston and Chicago. While these have been deemed “safer” markets to invest in, there are plenty more cities that have grown at the same — or faster — rate than these larger metropolitan areas. But what does one look for in order to invest?
While it is easy to look at rent growth retroactively and say, that would have been a good investment, it is difficult to look forward to find the best place to invest with accurate foresight. However, the recent success of the apartment market has shown that two key variables have driven apartment demand – job growth and tech-related job growth. This implies that these variables serve as a compelling gauge of future apartment performance.
The top five markets that saw the highest rent growth rates, in order, are Seattle, Oakland, Portland, San Francisco and San Jose. These markets all saw rent growth rates of 33% or more from 2012 to 2016 — this averages more than 8% per year! Yet job growth in Oakland and Portland was not as strong as the other top ten markets listed below.
The metros that did add the most jobs saw sharp rent growth, but some of these less urban metropolitan areas did not see as high (rent) growth as the more urban or tech-related metros did. These include Las Vegas, San Bernardino and Palm Beach that suffered more during the housing recession as well.
Likewise, the metros that saw low job growth correspondingly had low rent growth, but this was not always the case.
Pittsburgh, easily the most urban market on this list, saw very little job growth but oddly, rent growth was relatively strong. The other metros listed on this table would not surprise most prospective investors.
The numbers in both tables beg the question: is job growth an accurate predictor for rent growth? The answer is yes, but with some caveats. First, note that the correlation coefficient for job growth and rent growth (2012-2016) for the 82 markets that Reis tracks was 66%, high by most standards but perfect correlation, of course, is closer to 99%.
Second, the tech boom was clearly a bigger driver of rent growth as these markets outperformed the others. This idiosyncratic trait or variable could possibly be more properly measured using income or wage growth instead of job growth; however, Boston and New York saw high income growth over these years yet their job and rent growth rates put them in the middle of the pack.
It should be noted that when the top five tech markets were removed from the list of 82, the correlation coefficient between job growth and rent growth jumped to 72% which is significant. In other words, job growth is a considerable driver of rent growth, but there is always another idiosyncratic factor affecting every local economy.
At the end of 2016, rent growth rates slowed across the U.S. due to an abundance of new construction outpaced demand growth. Although this concerns both landlords and investors alike, occupancy growth was still positive in nearly every market as job growth has held the demand for apartments steady.
This is worth considering as construction is expected to stay robust for 2017 and 2018. Rents may stay flat, but net absorption should stay positive and keep in line with job growth. In other words, the market should still see positive returns, but the rate of return is not as robust as it had been over the last five years.
About the Author
Barbara Byrne Denham is a Senior Economist in the research and economics department at Reis, the team responsible for the firm’s market forecasting, valuation, and portfolio analytics services.