The Impact of Employment Data on CRE, Construction and Multifamily

Economic reports from the federal government and some private third parties on construction spending and employment have implications for various aspects of commercial real estate, according to a report from Moody’s Analytics.

Start with construction spending, as on January 3, the Census Bureau announced that November 2022 construction activity of $1,807.5 billion was 0.2% over October’s $1,803.2 billion, which was revised downward by 0.2%. And, as these notes often say, the confidence interval around the November numbers was plus or minus 0.8%. Because the confidence interval included zero, the agency can’t tell whether there was an actual change or not.

Even with the change in October, according to the Moody’s analysis, “the November 2022 increase is supported by gains in nonresidential construction that more than offset residential declines.” And while single-family construction was down 2.9% month over month, or -10.2% year over year, multifamily construction was up 2.4% month over month or 10.7% year over year. Since April 2020, “private residential new multifamily construction spending has well outpaced single family and the trajectories have move in severely opposite directions in recent months.” The split likely owes to higher mortgage rates, as Moody’s notes, and probably the explosion in house prices, given other data and what sources have told GlobeSt.com over time.

Still, things aren’t easy for multifamily. Last year wasn’t as bright as expected, with only 100,000 total units added, according to Moody’s. Labor and materials shortages or delays, compounded by financing, took their toll.

“As for 2023, the long-term prospects for the sector remain very bright, and the train has left the station for many of development projects; given this, we expect a substantial increase in completions later in 2023, prompting total completions for the year to be in the vicinity of 200,000 units,” the firm wrote.

Employment saw the JOLTS report for November showing job openings at 10.46 million, down from October’s revised 10.51 million — still almost 1.7 jobs per unemployed person. The quits rate was up 10 basis points to 2.7%, so workers still feel confident that they can leave one job and find another.

The December jobs figures backed that up to some degree: 223,000 new jobs that were above consensus expectations of about 200,000. The labor market may have cooled slightly, but it’s still robust. Moody’s noted what others have said — that this is more grist for the Federal Reserve’s plans to keep increasing interest rates, which drive short-term and adjustable-rate financing. But there’s another implication for multifamily.

“Affordability issues remain, and this is taking some of the bite out of rent growth, but Q4 still saw well above average growth and while we expect a deceleration in that growth to come at some point in 2023, we do not expect any widespread multifamily rent declines unless we see quite a bit more labor market stress,” Moody’s wrote.