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Low Unemployment Underscores Confidence In Rentals, Retail

As the pool of unemployed Americans has dwindled, real estate is feeling the love. Though all parts of the industry benefit from low unemployment, a new report from Marcus & Millichap shows that two sectors are seeing especially strong results: Class-C multifamily and brick-and-mortar retail.


Because they are open to the largest pool of potential renters, Class-C multifamily assets have seen a surge of leasing activity. Nationwide, Class-C vacancy hit a 20-year low of 3.5% in June. Meanwhile, with more money in their pockets, Americans have been visiting boutiques and eating out more often. The question now is whether these trends will intensify or begin to slow in the face of global economic headwinds.

“Unemployment really is the key to everything,” said John Krueger, regional manager for Manhattan at Marcus & Millichap. “Low unemployment is really a positive, but as an economy we need to be disciplined now so we don’t repeat our past failures.”

Unemployment hit its lowest point in almost 50 years in May, coming in at 3.6%. Though the metric ticked up to 3.7% for June and July, a solid July jobs report kept economists saying that the U.S. may be nearing full employment.

When unemployment falls, it is often the higher end of multifamily that gets the biggest bump — as people earn more, they feel more comfortable paying higher rents, boosting demand for mid-market Class-B and luxury Class-A rental properties.

But Class-C has actually shown a more profound change than luxury for a few reasons, Krueger said. First, wages haven’t grown as quickly as economists had expected given low unemployment, meaning demand for affordable rentals is high. Second, many developers have seen this demand coming and have repositioned Class-C apartments throughout the Sun Belt states where job growth has been strongest.

“Developers have taken these garden-style apartments in places like Florida and Texas and given them a facelift,” Krueger said. “Maybe it’s just a new kitchen and a new bathroom, but they’ve turned a 30- or 40-year-old building into something very desirable.”

Krueger mentioned Orlando, Florida, Austin, Texas, and the Carolinas as markets where strong job growth has underpinned real estate demand and spurred development. But even these markets have become somewhat picked over, he said, and he knows many of his colleagues are looking with interest at suburban Georgia and Alabama for some of their next opportunities.


Class-C multifamily has also been strong from the point of view of investment. Unlike downtown core assets and luxury rental buildings, Class-C apartments offer developers an opportunity to add value and thus see higher returns.

“Markets like New York City have already been juiced,” he said. “You move out of the city 15, 20 miles, though, you see there’s more value to be squeezed out.”

As the labor market tightens, Americans are starting to get paid more for their work. Wage growth is pacing at 3% annually, Marcus & Millichap reports, and that extra cash is bolstering consumer spending. Spending at restaurants and bars is rising at 3.6% year over year, and 2018 was the first year in which Americans spent more at restaurants than they did at grocery stores.

The businesses that are thriving are ones that are immune to the effects of e-commerce. Americans can now use the internet to order home goods and even fresh food. But businesses like gyms, salons and restaurants cannot be replicated online, Krueger said. These experience-based businesses have been gaining ground even in the face of the so-called retail apocalypse.

When viewed against the backdrop of record low unemployment, however, wage growth has been sluggish. Some estimates place real wages rising at a mere 1.6% year over year

Krueger suggested that many of the jobs that have been created during the recovery from the last recession have been low- and medium-income jobs. If the economy keeps improving, he said, high-income jobs should return and wage growth should catch up. 

But to continue the economy’s sustainable growth, developers, investors and lenders need to exercise discipline. While Krueger said cycles of economic expansion and contraction are inevitable, the real estate industry should lend more responsibly than it did in the years leading up to the last recession.

“When we start thinking everything is all good is when we tend to get into trouble,” Krueger said. “We need to remember how the markets crashed 10 years ago so we can be smart with our money.”

This feature was produced in collaboration between Bisnow Branded Content and Marcus & Millichap. Bisnow news staff was not involved in the production of this content.