Decoding the U.S. Job Market: Implications for Multifamily

The U.S. job market shifted down a gear in June, marking the slowest growth since a decline in December 2020. While this news may seem concerning, a deeper look into the broader economic context presents a more complex picture. Could this be the start of an economic cooldown, influenced by the Federal Reserve’s previous interest rate hikes?

Total non-farm payroll employment rose by 209,000 jobs in June, according to the Bureau of Labor Statistics (BLS)—a noticeable decrease from May’s 306,000 and the past year’s monthly average of 316,000. Accompanying this slowdown is an uptick in part-time employment, potentially indicative of reduced hours due to slack work or sluggish business conditions.

Monthly Job Creation, 2022-23

Source: Bureau of Labor Statistics

However, wage growth has surpassed predictions, rising 4.4% annually, according to the BLS. This scenario creates a challenging balancing act for the Federal Reserve, which has raised interest rates consistently over the past 18 months with the goal of reducing inflation to 2%. While slower hiring could help achieve this target, the unexpected wage increase might necessitate further actions to curb inflation. And despite the overall slowdown, worker demand remains high: According to the BLS, there are nearly 1.7 job openings for every job seeker, another factor that could complicate the Fed’s task.

The labor market remains resilient, with unemployment remaining steady at 3.6% in June, according to the BLS. Interestingly, sectors like construction, often sensitive to interest rate increases, have sustained and even expanded their workforces, despite the Fed’s interest rate hike to a 16-year peak in 2023. Construction industry employment has grown monthly by an average of 15,000 jobs this year, and June saw an increase of 23,000. Residential building employment has risen by 11%, driven by new home construction spurred by a shortage of existing home inventory, the BLS says.

The labor market’s continued relative stability highlights relevant considerations for investors in multifamily real estate. Job creation and housing demand are closely linked: A robust employment market boosts housing demand, enabling more individuals to afford homes or lease apartments at premium prices.

The Fed’s monetary tightening has prompted lenders to pull back on new construction financing, creating potential for a period of more vigorous rent growth ahead. Housing needs were already unmet before the onset of higher inflation and rising interest rates, and the shortage of capital for new housing developments will exacerbate that scarcity. This situation strengthens the long-term appeal of multifamily real estate as a sound investment opportunity.

In the near term, there is likely to be some pain for multifamily investors. Additional interest rate hikes could trigger a much-anticipated economic downturn, affecting household formation plans and thereby reducing apartment demand. Higher interest costs, unless properly hedged against, degrade cash flows and erode property values.

Although June’s inflation data motivated a Treasury buying spree, resulting in a slightly less negative 2s10s spread—the difference between the two-year and 10-year Treasury yields and a measurement of the steepness of the yield curve and historically a harbinger of a recession. The yield curve very recently reached its steepest inversion since 1981. Yet, multifamily real estate typically shows greater resilience during economic downturns compared with other commercial real estate types, as it fulfills a basic need.

Multifamily real estate serves as a natural inflation hedge and can provide stable revenue during economic downturns, but not all properties are recession-proof. Investors should pay close attention to local market conditions, prioritize resident retention through excellent service and creative social events, and use technology to streamline operations, improve resident service and reduce costs. These measures can help ensure that multifamily assets remain resilient and provide income even in challenging economic conditions.

However, there was also positive news this past week on the inflation front: The Labor Department reports that the consumer price index (CPI) rose 3% in June compared with the same period last year—a further decline from 4% in May and a significant decline from the recent high of 9.1% in June 2022. The last time inflation fell near this level 3% was in March 2021, when it was 3%.

Although inflation appears to be easing, it is widely expected that the Fed will raise rates later this month. Owners with long-term fixed-rate financing stand to weather additional rate hike pressures. Those with floating-rate debt or expiring rate caps might face more significant pressures. As tighter lending protocols loom, multifamily debt holders may require new equity when refinancing, potentially creating opportunities for fresh capital and investment deals.