From job growth flows household formation. Household formation stimulates housing development. Those are intuitive concepts, but when examined visually, the relationships are striking. MPF Research did just that by comparing household growth and apartment supply growth in terms of job creation across the top 50 U.S. metros.
The chart below illustrates these relationships from 2010 through 2015, which covers the years during the economy was recovering from the Great Recession. Metro-level employment growth, represented by the size of the bubbles in the chart, was measured on a proportional basis using data from the Bureau of Labor Statistics. Household formation data was gathered from Moody’s Analytics, and MPF Research tracked apartment inventory growth.
Just a cursory look reveals that the South and West regions of the U.S. attracted more jobs during the recovery years than did the Midwest and Northeast. The South and West also saw faster household formation and apartment supply growth.
These results cover an unprecedented period in the U.S., when the economy was slowly recovering from the greatest financial catastrophe in a generation. Indeed, this does appear to distort the results somewhat. A distinct linear relationship is especially clear when looking back over a longer, 10-year time frame.
Disparity between regions stems from certain economic characteristics that drive or slow job growth, which inevitably affects housing demand and apartment development activity. Several economic tailwinds have favored the South and West regions during the past decade. But that effect was most pronounced over the last five years, when the employment grew nearly 2.5 times that of the Northeast and Midwest. That robust job growth has channeled household formation – more specifically, apartment development. The supply of new apartments grew by roughly 715,000 units over the last five years. That is nearly four times the volume delivered to the Northeast and Midwest regions. Furthermore, apartment fundamentals in the South and West continue be stronger than their Midwest and Northeast counterparts, consistently producing stronger rent and revenue growth. But industries in the Northeast and Midwest have picked up despite concerns of mounting outmigration, distressed single-family market and trepidation of a strong dollar suppressing export activity.
Let’s take a glimpse at each region.
The Northeast region, with metros like New York and Boston, has been regarded a financial powerhouse. But broad headwinds from the high cost of living and of doing business, sluggish population growth and aging workforce have caused much of the region to lag the recovery of the warmer Sunbelt. On an aggregate basis, job growth in the Northeast has been the slowest to recover, with the region adding just over 1 million jobs during the past five years. New York and Boston, accounting for roughly 75% of those job gains, have been bright spots. Meanwhile, pricing in the northeast remains very costly. When we look at the multifamily space, apartment fundamentals have been slow moving. Rent growth has averaged about 2.5% to 3.5% in each of the last four years. That was a considerable slowdown from 2010-2011, when apartment demand in the region reached a decade high. But not surprisingly, apartment inventory growth in the Northeast region was the slowest to expand over the last five and 10 years. Furthermore, the development pipeline is the least robust, and is expected to expand about 2% over the next year. By comparison, the national apartment stock is expected to grow about 3.2% during that time.
The Midwest is a region where industrial manufacturing is concentrated. This mature industry is evolving to focus on productivity and efficiency, which is good for corporate profits and economic output, but usually leads to slower job growth. The U.S. has about 12.3 million manufacturing jobs, a bulk of which are in the Midwest, according to the Bureau of Labor Statistics. That is a net loss of about 2.0 million jobs from the pre-recession peak, and about 5.0 million fewer than in 2000. Furthermore, the Midwest’s percentage of national GDP declined from 22% in 2000 to about 20% in 2014, according the Bureau of Labor Statistics. But there has been some good news for upper Midwest states: Auto sales reached a 15-year high in 2015, according to Edmunds.
Housing in the Midwest, both in the single-family and multifamily sectors, is the least expensive in the country. When we take a look at growth in the overall apartment stock, Columbus, Indianapolis and Minneapolis were the shining stars of the Midwest, especially during the recovery years. Furthermore, those metros were the only ones to post double-digit employment growth over the past five years. In absolute terms, Chicago and Detroit – the region’s largest two metros – had the biggest employment gains, accounting for about 25% of the region’s overall employment growth during the past five years.
The West is the most economically diverse region nationally, but overall fundamentals remain strong. The region is fueled by favorable demographics, a highly skilled workforce, above-average income gains and tight housing supply. There is encouraging news for single-family market, which continues to see the highest appreciation. Recently, NAHB’s Housing Market Index, which measures builders’ confidence in the housing market, measured the highest in the West. This was an indication of optimism on the single-family side after lagging the other regions in 2011 and 2012. Builder confidence is a good sign as the peak home-buying season approaches this summer. A prohibitive aspect of the West region has been the expensive housing costs. Many areas are seeing home appreciation far outpace income growth.
The bright side for apartment owners is that rent growth are heating up. Average apartment rents in coastal markets like Los Angeles and the Bay Area are between $2.50 and $3.75 a square foot. By comparison, the national average was $1.40. And if you’re an owner or operator, the good news is that strong demand keeps occupancy tight and rent growth among the national elite. But the best story for the West has been jobs – lots of jobs. Emerging and established tech markets like the Bay Area, Denver and Seattle have been the driving force behind the region’s job growth. San Jose and San Francisco have grown their employment bases by nearly 30% over the last decade, ranking second and third nationally.
The South region has been a bright spot for the U.S. in terms of economic growth. Tailwinds like inexpensive housing, a plentiful supply of labor and warmer weather have benefited much of the region in recent years. Corporations are relocating to the South in search of a cheaper cost of doing business. And the workers have followed. Domestic state-to-state migration patterns indicate a positive net effect in the South, with people in search better employment opportunities and a cheaper cost of living. And developers have noticed this trend. Over the past five years, nearly 500,000 new apartment units have been delivered into the southern region. Furthermore, there are about 175,000 units expected to be delivered during the next year, and the South is expected to account for nearly half of the nation’s new apartment supply. During the past five years, Washington, DC, Dallas, Austin and Atlanta were among the top 10 nationally in terms of new apartment supply. Proportionally, the South clearly dominated, capturing six of the top 10 spots, as the base of existing apartment units expanded from 9% (Dallas) to nearly 17% (Austin). One metro has emerged head-and-shoulders above the rest as a clear growth leader: Austin.
For nearly a decade Texas’ capitol city has been a standout performer in terms of housing supply growth coupled with a long run of strong job growth. Austin’s nonfarm workforce has exploded, growing roughly 51% since 2000, five times the national average. Proportionally, that was the highest percentage growth nationally.
Tight conditions in the labor market has fueled very strong housing demand. Apartment supply has expanded roughly 39% over the past decade, and is expected swell another 5% in the next year. Furthermore, single-family demand suggests that it’s definitely a seller’s market. The months of available supply has hovered around two months for more than two years, according to the Texas A&M Real Estate Center. That’s less than half the national average, at five months. Austin is a growing entrepreneurial tech hub, bringing in $740 million in venture capital funds in 2015, the most since 2001, according to the National Venture Capital Association. Augmenting the city’s millennial magnetism are the longstanding arts festivals South by Southwest and Austin City Limits, which drew a combined quarter-million attendees in 2015.