Weak Job Growth, Rising Wages, and the Outlook for Multifamily

June 15, 2016

Overview

 

This month’s job growth report has caused a lot of hand wringing and consternation, given the relatively low number of new jobs created (38,000) and the oil and gas sector’s continuing to shed jobs in its industry-wide downturn. Nonetheless, wages and spending continue to be strong, which generally improves the outlook for multifamily rents. The seemingly weak numbers do argue, fortuitously, against any short-term increase in rates, and Fed Chair Yellen has all but ruled out any imminent hike and will likely hold off, perhaps until September.

 

Reading beyond the headlines, the BLS’s numbers show that as of June 2016, overall US employment remained strong, with an unemployment rate of 4.7%. Around the country, employment was highest in Denver (97.1%) and lowest in Chicago (93.6%). Among MSAs, the top five year-over-year job increases were in 1) New York 2) Dallas 3) Louisville 4) Atlanta, and surprisingly my hometown 5) Philadelphia.

 

The Backstory

 

While the absolute number of jobs created is small, even accounting for Verizon’s strike (which took 35,000 workers off the payrolls temporarily), what has received little attention is the fact that the unemployment rate is very low and the labor market has been tightening, with job openings at a record high and employers reporting difficulty finding qualified workers. It is worth noting that the US economy has added more than 14 million private-sector jobs since 2010. As a result, wages have been rising, and at a year-over-year 2.5% gain, represent the largest increase since 2009. These higher wages, coupled with greater disposable income resulting from low gas prices, are fueling strong consumer spending. Consequently, experts predict robust demand for apartments and steadily rising rents.

 

Multifamily Trends

 

The big, fundamental trends (Millennials coming of renting age, Boomers downsizing, and homeownership generally losing its appeal) continue to fuel demand for multifamily, particularly in markets historically underbuilt, such as Philadelphia, Las Vegas and Sacramento. Experts predict these trends will continue for years. Jobs and population growth translate into robust demand for apartments and increasing rent pressures.

 

Although slightly below last year’s 6.3% increase, rent growth was 6.0% year-over-year and projected to be in the 4.0% to 5.0% range for the full year 2016. Demand is expected to continue unabated, and occupancy rates remain strong at around 96.0% nationwide.

 

Financing Multifamily

 

With a record $1.1 trillion in the fourth quarter of last year, multifamily debt, fueled by Fannie Mae, Freddie Mac and the commercial banks, remains abundant. With leverage to 80%, 30-year amortizations and rate spreads in the low 200’s for full leverage, owners are gobbling up debt at prodigious rates. It really doesn’t get much better than this.

 

Takeaways

 

With today’s low rate environment and plentiful capital, we are advising owners of stabilized and near-stabilized multifamily assets looking for leverage to lock as low and long as possible now. While there may be better terms available sometime in the future, we believe it is prudent to find the best capital execution and run with it rather than trying to time the market exactly. We can certainly help with that.

 

Axcel Multifamily Finance provides Fannie Mae, Freddie Mac and HUD loans for stabilized and near-stabilized multifamily assets nationwide. Contact Michael Young at (646) 524-7989 or Stephen Arrivello at (215) 367-1675 to discuss your multifamily financing needs.

 

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