Market Commentary Blog

Payroll employment beat expectations again as nonfarm payrolls jumped 295,000 in February. Job growth has steadily accelerated, with the average monthly increase over the past 12 months moving up to 275,000, the strongest performance in a decade and a half. The unemployment rate moved down to 5.5%, the lowest since before the financial crisis. The question on everyone’s mind is, how long can this continue before an overheating job market prompts the Fed to put on the brakes? 

The multifamily housing market had a stellar performance in 2014, leaving everyone to wonder what comes next. Would the market take a breather, perhaps, as home sales start to pick up? And how much of a threat does the swelling construction pipeline pose to rents? Recent news from the job market suggests that rental demand has the wind at its back. In particular, employment growth of those aged 25 to 34—the prime years for signing a new lease on an apartment—has pulled ahead of all other age groups. 

Construction of new multifamily housing increased to a 381,000 unit seasonally adjusted annual rate in January, as robust demand for rental housing and record prices of apartment buildings provide strong incentives to build new supply. Multifamily housing starts are running nearly four times the average pace during 2009 and 2010, prompting some fears of overbuilding. A peek a bit further back in time, however, casts the recent trends in a bit different perspective. 

The apartment sector remains robust. Vacancy rates continued at 4.2%, a decade-low level that indicates little (if any) excess supply. An acceleration in the national job market has spurred household formation and continues to fuel strong rental demand. Rent growth eased to a 2.5% annual rate; this slowing may be due to seasonal demand weakness during the fall. 

The job market got off to a roaring start in 2015—and, as it turns out, hiring was also stronger at the end of 2014 than was initially reported. According to the most recent data, nonfarm payroll employment rose by 257,000 in January, and the average monthly growth for Q4 was revised up to 324,000—well above the 289,000 that was previously published (chart 1). Most sectors posted robust job gains, including construction, manufacturing, retail trade, business services, and health care and hospitality. Government employment declined slightly.

GDP growth slowed to a 2.6 percent annual rate in the fourth quarter, from 5.0 percent in Q3. Despite the deceleration in the headline number, however, the report was strong where it counts. Consumer spending, the mainstay of the U.S. economy, accelerated to a 4.3 percent annual growth rate, the strongest gain since 1993. The slowdown in overall growth stems from a decline in net exports due to weaker growth abroad and a stronger dollar.

The fundamentals for the apartment sector are rapidly improving as the job market recovery gains momentum. Demand for rental housing surged in 2014, with the total number of occupied rental units increasing by 2 million units (first slide). This is a record increase in rental occupancy, according to Census Bureau data beginning in 1965, surpassing by a wide margin the previous record rise in rental occupancy of 1.5 million at the onset of the housing crisis in 2007.

Listed U.S. REITs returned +7.53% during January 2015 according to the FTSE NAREIT All REIT Index, which measures the total returns (stock price appreciation plus dividend payments) of all REITs traded on major stock exchanges in the U.S.  In contrast, the broad U.S. stock market suffered a decline at -1.47% according to the Dow Jones U.S. Total Stock Market Index.  Small-cap value stocks—sometimes mistakenly considered similar to REITs—did even worse at -2.11% according to the Russell 2000 Value Index, while large-cap stocks also underperformed at -1.73% according to the S&P 500 Index. 

Sustained above-trend job growth is having a broad impact on commercial property markets. Demand for rental housing has accelerated this year, allowing the apartment sector to absorb a significant increase in new supply with little impact on vacancy rates.

The outlook for commercial real estate markets and REITs has continued to evolve as the overall macroeconomic recovery matures. It is important to keep in mind just how much the momentum has changed. Two years ago, for example, the consensus outlook among the economists surveyed by the Wall Street Journal anticipated job growth averaging 160,000 per month. In January 2015, this panel expected job growth of 230,000 per month. It is certainly good news that after several years of disappointments, the economy finally appears to be hitting its stride.