Slowing Job Growth is Reducing Rent Growth

Axiometrics - Chuck Ehmann - 09 February 2017

It is well known that job growth creates demand for housing of all types, including apartments. Some of the best performing apartment markets have been metro areas with the strongest job gains. But demand is not the only measure of apartment market performance. Rent growth is another primary indicator of market performance, as it reacts to changes in both demand and supply. The magnitude of rent growth is closely watched by all players in the market, as is job growth

The following table lists the 10 metro areas with the highest annual job gains for December 2014 and their current ranking and job gains for December 2016. The table also lists their corresponding job growth and effective rent growth. The next two columns are the difference in job growth from 2014-2016 in basis points (bps) and the same two-year difference for rent growth.

The final column is the elasticity of rent growth to job growth -- the difference in rent growth divided by the difference in job growth. This measure is an indicator of momentum in rent growth to job growth. The higher the number (positive or negative), the greater the swing in rent growth relative to job growth.

All 10 of the listed metros added fewer new jobs in 2016 than they did two years previously. Seven were among the top 10 job gain metros in both 2014 and 2016. Perennial leaders, including New York, Dallas, Atlanta and Los Angeles, are joined by Boston, Denver and Riverside, which continue to be strong job generators. Phoenix and Chicago are producing fewer new jobs in 2016 than they did two years ago, and the well-publicized decline of Houston is evident from its current ranking in Axiometrics’ top 120 metros as well as its weak (but positive) annual job gain total of 14,800 jobs for December 2016.

With reduced job gains, naturally, job growth also fell in each of these metros – some by a lot. Not surprisingly, Houston fell the most, dropping by almost 360 bps, while six of the remaining nine fell by at least 100 bps (averaging -150 bps). Dallas and Boston’s job growth dropped by an average of 54 bps, and the large economy of Los Angeles slipped by only 4 bps despite gaining 500 more jobs in 2016 than 2014.

As you would expect given the high correlation between job growth and effective rent growth, almost all of these top 10 metros experienced reduced rent growth in 2016 compared to 2014. December 2016’s rent growth was negative in New York and Houston, falling more than 500 bps in each. Seven of the eight remaining metros averaged about 320 bps slower rent growth than in 2014, while Riverside’s effective rent growth climbed by 143 bps from 2014.

Turning to the elasticity calculation, we see that Los Angeles’ rent growth dropped by about half while job growth changed little, resulting in an abnormally high outcome. Most metros had an elasticity value between 2-4, indicating a two-to-four-fold change in rents compared to job growth. Phoenix had rents and job growth change at nearly the same amount, while Riverside’s increasing rent growth coupled with a drop in job growth resulted in a negative elasticity value of 0.6.