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Commercial Department: Property TypeCast: May 2018

 

Property TypeCast

Job-growth patterns offer insights into occupancy trends

c_2018-05_property_typecast_chart.jpgMuch has been written about millennials and their risk aversion to buying a home over the last decade. Many live with their parents for an extended period, well beyond that of previous generations. This anecdotal sentiment has been told over and over, but do the numbers support this claim?

As the economy has expanded, has the apartment market moved in step with job growth? And does the recent growth in the housing market mean that millennials are finally buying homes?

The answer to these questions, like so many economic and real estate questions, is best answered with numbers. The chart on this page shows the growth in overall housing occupancy per quarter divided by growth in employment.

The chart clearly displays how the trend in overall housing-occupancy growth over the past seven years contrasts sharply with occupancy growth during the housing boom. Not only was most of the expansion in 2004 through 2007 in owner-occupied housing rather than rentals, but the numbers show that occupancy grew at a rate of nearly one unit per job gained. 

The horizontal bar on the chart representing the average from 2004 to 2007 shows 0.8 housing units were occupied per added job. The average gain in the renter-occupied sector over the period was 0.4 units per added job, and this average was buoyed by the surge into apartments in late 2007 before the housing market crashed. From 2010 to 2017, the average overall occupancy growth was 0.4 units per added job, and most of the gains were in renter-occupied units.

The fact that most of the gains in occupancy since 2010 were in renter-occupied units is no surprise. The housing bust spurred significant growth in the apartment market in its wake. It also is not surprising how steady these occupancy-to-job-growth ratios were compared to the previous period — 2004 to 2007.

What is striking in the chart is that overall housing-occupancy growth per added job jumped at the end of 2014 through 2015 to 0.7 units per job, up from 0.4 units in the previous 12 quarters. This 2014-2015 period saw the highest job growth per quarter as well. Thus, the higher occupancy-growth-per-job-gain ratio means that occupancy increased faster than job growth, which suggests that those newly employed were more confident about leasing their own space than they were in 2012 to early 2014.

Since 2015, however, the trend has ebbed a bit. This may be due to a sense of apprehension about the duration of this expansion, but this is particularly odd given that apartment construction has surged in many metros, which has kept a lid on rent growth. Reis Inc. data shows that apartment effective rents grew 5.8 percent in 2015 before decelerating to 3.9 percent in 2016 and 3.6 percent in 2017. With slower rent growth, one would expect occupancy growth to move at the same pace as in 2015, but it has not.

Another striking observation in the chart is the growth last year in owner-occupied units — the first in nearly 12 years — as the pent-up demand for buying a home appears to have finally cracked. Although this, along with the decline in renter-occupied units, may look daunting for the apartment market, the recent doubling of the standard deduction that was included in the Tax Cuts and Jobs Act of 2017 has sharply cut the incentive to buy a home and could possibly reverse this trend seen at the end of last year.

Apartment-occupancy growth remains positive in 2018 as job growth has accelerated. Whether this reflects overall confidence from the tax overhaul or the reduced homeownership tax incentive is not immediately clear. It is likely a combination of the two, but the answer will inevitably be revealed in the numbers.


 

Victor Calanog is chief economist and senior vice president for research at Reis Inc. (www.reis.com). He writes a monthly column on property types for Scotsman Guide. Calanog and his team of economists are responsible for data models, forecasting, valuation and portfolio services for clients in commercial real estate. Reach him at victor.calanog@reis.com. Barbara Byrne Denham is an economist in the research and economics department at Reis Inc. She previously served as chief economist at Eastern Consolidated and is a Ph.D. candidate at New York University, where she has studied economics, monetary theory and game theory. Reach her at barbara.denham@reis.com.

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