Layoffs Looming: How Rising Unemployment Impacts Multifamily
Many American companies, ranging from tech groups to consumer organizations, are preparing for the potential economic crash by cutting costs. What’s a common way companies do this?
By firing people and decreasing their employee base.
Announcements of layoffs spiked by 13% in October 2022, which is as high as its been since February 2021.
Here are some of the biggest companies reducing their employee base.
Amazon.com is aiming to fire 10,000 employees.
Meta is planning to cut 13% of employees. That’s over 11,000 jobs.
DoorDash will be cutting 1,250 of its corporate employees.
Companies like Morgan Stanley, Intel, Microsoft, Johnson & Johnson, CNN, Lyft, Twitter, Coinbase, and Walt Disney have all announced job cuts in preparation for the economic storm that is believed to be headed our way. When jobs get cut, unemployment increases.
Recessions come hand in hand with unemployment. The classic definition of a recession is a “significant decline in economic activity that is spread across the economy and that lasts more than a few months,” according to the Washington Post.
When COVID first started all the way back in April 2020, unemployment rose to 14.7%. In a November 2022 Bureau Labor Statistics Report, the unemployment rate was at 3.7%. It has been stubborn, despite efforts by the Fed to get it to move.
So what happens to real estate when unemployment rises?
In recent years, real estate investors have benefited from widespread appreciation. Even beginner investors have sat by as their properties rose in value, along with rental rates.
We’ve been watching as prices in both single and multifamily rates have skyrocketed. But as interest rates have made it more expensive for investors to take out debt to buy investment properties, there has been a decline in demand.
Multifamily investors may be fearful of declining property values, falling rents, and increases in vacancies.
Let’s take a look at historical performance to determine what happens to multifamily rents during an economic downturn.
In 2007, single family real estate was booming. And then it imploded. House prices fell by 1.6% on average. 2008 was even worse for the housing market. Investors and homeowners saw home prices decline by 9.5%, a record at the time. This was directly caused by the drastic injection of inventory that flooded the market when over 6 million people in the U.S. lost their homes to foreclosure. This sparked the Great Recession.
But what impact did this have on multifamily rents?
Demand for rental units was high during the Great Recession. This is because demand for rental units always increases during times of economic hardship.
As it becomes more and more difficult to purchase a home, or keep the one they currently own, people gravitate towards rentals (like apartments). Although asking rental rates of larger apartment complexes did experience declines of 0.3% in 2008 and 4.1% in 2009 during the Great Recession, they came back rather quickly.
During a recession, apartment rental rates typically outperform other types of real estate. They also usually bounce back quickly after a recession, faster than other property types. For example, by Q4 of 2010, apartment rents that had declined during the Great Recession began to rise again. They experienced 2.3% year-over-year increases, which was a bit higher than the inflation rate at the time. During a survey conducted, it was found that 61 out of 64 metropolitan areas saw rental increases as 2010 came to an end. This was good news for apartment investors. Here’s why.
During the Great Recession, unemployment reached a height of 10% in October 2009. The majority of rental properties saw rental rate increases only a year later. Even during the lowest points of the 2008 recession, like when average asking rents fell by 4.1%, it didn’t have anywhere close to the kind of impact needed to kill cash flow.
For example, let’s say a property can be rented for $1,700 a month. A 4.1% reduction in rent would only be $69.7 a month. This isn’t the kind of hit to revenue that might scare someone away from multifamily investing. Many investors intend to hold their apartment buildings for the long-run anyway.
Multifamily Rental Rate Trends
Multifamily rental rates have increased by an average of 4.17% since 2000, even when you take the Great Recession into account. So yes, things are looking a bit uncertain right now. But that doesn’t mean you should panic.
Lasting Need For Housing
It doesn’t matter what stage we’re in in the economic cycle. Housing is something that Americans will continue to need, and it’s something consumers will prioritize over nearly everything.