The Pandemic-Era Labor Market and Its Effects on the Multifamily Real Estate Market
Since the onset of the COVID-19 pandemic, the labor market has been a hot topic amongst economists, policymakers, business owners and, of course, workers themselves. Seemingly overnight, the virus and subsequent public health response transformed one of the best labor markets in U.S. history into one of the worst. U.S. unemployment declined to 3.5% in February 2020. By April, it had peaked at 14.7% (i). Starting in mid-March, many workers, particularly those in hospitality and travel, lost their jobs as consumers dramatically pulled back spending amidst the lockdowns. By August, the unemployment numbers had improved to 8.4% (ii). While this is clearly an improvement, the job market still must recover millions of jobs to return to its pre-pandemic level.
As the labor market situation continues to unfold, clear trends have begun to emerge. While the initial economic recovery outpaced expectations, it has begun to slow down in recent weeks. The same is true of the labor market, as weekly new unemployment claims remain stubbornly above 850,000 (iii). There is also now a clearer picture of which industries and workers have suffered the most. Due to the dramatically uneven recovery, the state of the labor market has significant implications for multifamily real estate operators and investors.
Sectors and Workers are Becoming Increasingly Stratified
Upon examination of the data, it immediately becomes clear that certain sectors have been hit substantially harder than others. For example, from March-August 2020, leisure and hospitality has shed over 4.1 million jobs, or 24.5% of the total in that sector. The financial sector, on the other hand, lost only 191,000 jobs, or 2.2% of the total over that same time period (iv). Overall, it has become apparent that higher-wage workers who are able to effectively work from home have a significantly better employment outlook than those in service industries who rely on in-person interactions to do their jobs. Moreover, those in professional positions tend to out-earn their service industry peers (v).
This phenomenon is leading to an increasingly divergent outcome for workers in different parts of the economy. This is amply demonstrated by looking at employment data for college graduates vs. those with a high school degree only. As of January 2020, the unemployment rate for college graduates was 2% and for high school only it was 3.8%. By August 2020, the unemployment rate for college graduates had risen to 5.3%, but the high school only rate was a whopping 9.8% (vi). Thus, the unemployment differential between the two groups rose from 1.8% to 4.5% in eight short months.
As the recovery continues, this divergence in fortunes will persist until the public health situation improves and consumers feel more comfortable travelling, eating out, and engaging in other activities that require interpersonal interaction. That is likely to be months, if not a few years. Many non-college graduates work in the service sector where job creation will likely remain subdued for the foreseeable future. Moreover, many employers and economists had expected the job losses to be temporary as the general expectation was that COVID-19 would recede fairly quickly. As the public health threat and slower-than-hoped-for economic recovery have continued throughout the summer, however, some of those job losses previously thought to be temporary have become permanent. This will further hamper the recovery for lower-wage workers.
The Labor Market Divergence Has Meaningful Implications for Real Estate
As it pertains to multifamily properties, these diverging fortunes in employment directly affect a tenant’s ability to pay in-place rents, as well as his/her tolerance for rent increases. In the Southeast, which is Arcan Capital’s region of focus, we believe that most Class A and many upper-level Class B properties have tenants with professional occupations. With a few exceptions, they should continue to have the financial resources to remain current on their rents. Therefore, we would expect collections on these types of properties to remain relatively stable or decrease slightly. This is particularly true of well-located properties with a diverse tenant base. Higher quality assets in Arcan’s portfolio have remained quite durable and some of them did not have a single delinquency in August.
As for rent increases, we believe that the slowing economic recovery and, to some degree, the recent, dramatic increase in home sales will have a downward effect on rents. Rather than see continued rent increases, most properties and markets should see flat or slightly declining rents over the next 12 months. There are some interesting outliers, however, as we believe that certain well-located Class B assets could continue to see selective rent increases as cost-conscious tenants move down from Class A properties. Indeed, some markets, such as Atlanta, have seen rent increases on Class B properties during the pandemic (vii).
Overall, the labor market is telling a much more complex story than the headlines might suggest. While certain segments of the population are feeling tremendous pain, others appear to be somewhat insulated. For multifamily owners and operators, this means that success will hinge on tight investment selection criteria, careful underwriting, intensive management, and paying close attention to data and labor market trends.
(i) Kochhar, Rahesh. “Unemployment rose higher in three months of COVID-19 than it did in two years of the Great Recession”, June 11, 2020, Pew Research Center https://www.pewresearch.org/fact-tank/2020/06/11/unemployment-rose-higher-in-three-months-of-covid-19-than-it-did-in-two-years-of-the-great-recession/#:~:text=The%20Great%20Recession%2C%20which%20officially,Center%20analysis%20of%20government%20data.
(ii) U.S. Bureau of Labor Statistics https://www.bls.gov/charts/employment-situation/civilian-unemployment-rate.htm
(iii) Ip, Greg. “A Surprisingly Durable Economy Faces Tougher Tests,” The Wall Street Journal. September 9, 2020. https://www.wsj.com/articles/a-surprisingly-durable-recovery-faces-tougher-tests-11599662594
(iv) U.S. Bureau of Labor Statistics https://www.bls.gov/charts/employment-situation/employment-by-industry-monthly-changes.htm
(v) U.S. Bureau of Labor Statistics https://www.bls.gov/oes/current/oes_nat.htm#00-0000
(vi) U.S. Bureau of Labor Statistics https://www.bls.gov/web/empsit/cpseea05.pdf
(vii) Tenenbaum, Sam; Kahn, David. “Workforce Housing Withstands the Worst of the Pandemic”, September 2, 2020, CoStar Insights https://product.costar.com/home/news/shared/383663251?utm_source=newsletter&utm_medium=email&utm_campaign=personalized&utm_content=p5