September 6, 2023
Slowing Labor Market Recovery and its Broader Implications:
August recorded a net addition of 187,000 jobs, signifying one of the slower hiring months since the pandemic began. Notable job losses occurred in the information and transportation sectors, largely attributed to events like Hollywood strikes and the Yellow trucking firm's bankruptcy.
This slowdown in job growth is reflective of a return to labor market conditions that were prevalent before the pandemic. From May onwards, employers have been hiring at a rate less than the 2019 monthly average, and the unemployment rate rose to 3.8% in August.
Additionally, fewer employees are voluntarily exiting their jobs, which indicates a labor market that's growing, albeit at a decelerating pace.
Economic Indicators and Federal Reserve Decisions:
The core personal consumption expenditures (PCE) index, the Federal Reserve's go-to metric for inflation, showcased a marginal increase from May to July. This minimal surge is the smallest in recent times and underscores easing inflationary pressures.
Given the recent trends in inflation and labor market dynamics, the Federal Open Market Committee might adopt a flexible stance in its forthcoming meeting. While an increase in the overnight lending rate isn't entirely ruled out, prevailing sentiment in Wall Street is leaning towards maintaining current rates.
Multifamily Real Estate Dynamics:
The multifamily real estate market has witnessed a sharp decline in apartment sales, with a staggering 76% YoY drop in July to $6 billion, as reported by data firm MSCI Real Assets.
The liquidity crunch in the market has resulted in rising cap rates, touching 5% in July, marking a 30 basis points increase YoY. For specific apartment types like mid- and high-rise apartments, cap rates rose to 4.9%, and for garden apartments, it increased to 5.0%.
This downturn isn't limited to a specific asset class. Garden volume and mid- and high-rise transactions experienced a drop of 76% and 75%, respectively. Single asset trades too witnessed a 74% decline, while portfolio and entity deals saw an even larger drop of 82%.
These figures not only deviate from the 2021 and 2022 statistics, when the apartment market enjoyed excess liquidity but are also 53% below the five-year average prior to the COVID-19 pandemic.
While liquidity seems scarce, industry observers are optimistic, believing that capital is on standby, ready to invest as soon as attractive opportunities arise. As pointed out by Mai Zhang, senior vice president of asset management for The Davis Cos., fundraising in the real estate sector is at an all-time high. Notable players like Blackstone have raised significant funds, though challenges persist around deal financing.
On the West Coast, the situation mirrors the national trend, with transaction volume dropping by 55% and cap rates hovering between mid-4% to low-5% for high-quality assets. As Angela Kleiman, CEO of Essex Property Trust, mentioned, interest from buyers remains strong, though many await clearer cues on interest rate movements.
Factors like interest rates, along with plateauing rents, are creating challenges in determining property values, as noted by Equity Residential CEO, Mark Parrell. With considerable capital awaiting deployment, the next year is anticipated to witness a potential shift in the multifamily market dynamics.
Commercial Real Estate and Its Interplay with Broader Economic Factors:
The rise in interest rates, especially in 2022, led to a subdued investment sales environment in 2023. H1 2023 transaction volumes mirrored the 2015 figures. However, with increasing investor confidence in stable interest rates, the transactional activity could rebound.
Industrial properties remain a bright spot. Despite a dip in transportation jobs, manufacturing employment has shown growth, reflecting national industrial trends. The demand for industrial properties remains strong, leading to increased rent requests, which surged by 14.2% in Q2, significantly outpacing general inflation.
Healthcare Hiring and Multifamily Outlook:
Growth in the healthcare and social services sector has been impressive, adding over 97,000 jobs recently. This consistent employment growth is favorable for apartment demand. Throughout the year, multifamily property net absorption has been positive, alleviating rising vacancy rates due to extensive development. Rent growth is witnessed across rental classes, with Class C experiencing the most significant growth.
In conclusion, while the labor market's recovery pace is decelerating, broader economic and real estate trends, especially in the multifamily segment, are witnessing significant shifts. The Federal Reserve's impending decisions, amid subdued inflationary pressures, coupled with evolving dynamics in the multifamily market, will shape the economic landscape in the foreseeable future.