A Tunnel that Needs a Lot of Light?

“It’s a recession when your neighbor loses his job; it’s a depression when you lose your own.”
—President Harry S. Truman, 33rd president, 1945-1953

History repeats itself in a lot of ways, but not typically how I would expect it to. Punditry, for whatever it’s worth isn’t an exact science, like psychology. OK, I just upset a bunch of psychologists but be thankful you’re not an economist. Uh-oh now I’ve upset a bunch of economists!

But you’ve got to admit the amount of information swirling around about the lifeline of apartment rent health, the employment and unemployment numbers can make you wonder. I, for one, have been a big fan of history, or at least the part I agree with. I started out in this industry in the ‘80s. It was a simpler time, when we were aware that there were cycles in real estate and employment was going to go down and then pop up again not too long afterwards. Those were the days (cue Archie and Edith singing the song at the piano). Now we’re happy with 175,000 new jobs a month, which in my humble opinion works out to 60% of what we need in each metropolitan area with professionally managed apartments (think National Multifamily Housing Council markets). While this past release was better than expectations (who are these people with the expectations?), it still haunts.

The unemployment number, above 5.5% in most instances has remained stubbornly acceptable at between 6% and 7%, while the real unemployment number, based on workforce calculations is probably 15%. (Stay with me—I saw you yawn just now.)

We need an unemployment rate of just under 6% for full employment because lower than that creates workforce compression, with higher wage growth (due to competitiveness) acting as a break on the economy. At the same time, for apartments, we want to see 250,000+ jobs per month being added to 941 payroll counts, counts where we then get consistent pricing power. The most recent BLS release then, is in my view a disappointment and a simple failing to get employment back up to potential.

I believe the markets most affected by slow wage growth and limited employment growth, expectation junkies aside, including high cost, high barrier coastal markets and many investment grade markets where underwriting assumed higher rent growth than wage growth. The markets most likely to benefit and least affected in the long run include middle markets, manufacturing center recoveries and the Southeast in certain select places.

From an economist’s viewpoint, with apologies to psychologists and anthropologists and those other “gists” poking fun and looking askance at our industry, apartments are still showing gains and the gradual return to pre-recession levels is almost complete. In the “light someplace in the tunnel” department or “darkness before dawn” theorem, the economy is doing better than it appears. And apartments never looked shinier.