How Unemployment is Reshaping the Residential Market

Challenges straining workers and the labor market at large in the U.S. are rippling through the multifamily and residential sectors amid an overall decline in new construction.

A new study by Marcus & Millichap reveals that while the national unemployment rate reached a three-year high of 4.3% in July, a double-digit decline in housing starts and permits, along with elevated borrowing costs, may offer some relief to apartment investors.

“A reduction in the pace of new supply should nevertheless help stabilize the [apartment] sector following recent rent softness,” Marcus & Millichap said. “Meanwhile, decelerating single-family housing construction may sustain affordability barriers.”

Housing starts fell to a four-year low in July, with construction starts dropping 18% year-over-year. Apartment permits also fell by 15% as investors pulled back from once-booming regions.

Demand for apartments in the Sun Belt has remained elevated, but demand for permits in cities like Atlanta, Dallas-Fort Worth, Houston, Jacksonville, Raleigh and West Palm Beach has diminished, putting upward pressure on rents.

All the while demand for luxury apartments has stayed largely positive. Average asking rents for tenants extending leases on these apartments increased by about 4%, while metros with high barriers for homebuyers such as San Jose and Seattle saw that rate reach 5.5%, according to Marcus & Millichap.

Uncertainty in the job market and high mortgage rates have kept both buyers and sellers on the sidelines despite a slight drop in rates between July and August. Sales activity picked up slightly but remained 1.6% lower than a year ago, as soft labor market conditions and high borrowing costs likely deterred sellers from listing properties.

A report from RealPage found that New York, Los Angeles, and Chicago had some of the highest unemployment rates among the 50 largest metros in the country in July. New York’s unemployment rate reached 5.6%, while Los Angeles and Chicago had rates of over 6.5% and 6.2%, respectively. Nashville had the lowest unemployment rate among these metros at 2.9%, while Las Vegas had the highest at 6.7%.