CARROLLTON, TX—Growth in jobs is frequently relied upon as a metric for predicting future apartment absorption. However, findings from MPF Research indicate that this metric's reliability is “surprisingly bad.” In some instances, there's a strong correlation; in others, hardly any at all.

Using a variety of techniques, Carrollton, TX-based MPF analyzed the relationship between job growth and apartment demand over the past 14 years. For the combined core 50 multifamily markets nationwide, the ratio  between annual job growth  and annual net absorption for apartment units has varied widely during that time frame, ranging from -161 jobs per unit of demand to +130 jobs per unit of demand.

“Just in this current cycle of strong apartment demand since the start of 2010, the ratio has ranged from -7 to +17,” according to MPF. The variation is even greater when looking at individual metro areas. In MPF's home metro of Dallas/Fort Worth, for example, using the long-term average of 4.9 jobs per unit of absorption would produce a result that was 39.8% off base in 2014, and even wider of the mark in 2013.

“You might expect the ratio to have more value as a longer-term tool, smoothing out noise,” says MPF. “But that doesn't work, either, even at a national level. Between 2004 and 2007 (the previous up-cycle), the U.S. averaged 9.8 jobs per unit of apartment demand. If you assumed that relationship persisted in today's cycle (2010-2014), you'd have woefully undershot actual absorption by 36%—again assuming you had correctly predicted job growth.”

MPF's article, put together by Jay Parsons, the firm's director of analytics and forecasts, says the comparison between '04-'07 and the current cycle is useful in explaining why the jobs-to-demand ratio is “a horrendous predictor of future absorption” when no other influences are considered. The article notes that the ratio plunged nationally from 9.8 in the previous up cycle to just 6.6 in the current one.

How come? “In hindsight, there are some obvious factors—such as homeownership and demographics. More young adults in prime apartment-renting age and more obstacles to buy homes (among many other factors) led to a lower jobs-to-demand ratio.”

In that respect, MPF sees “some rear-view mirror value” in the jobs-to-demand ratio, for comparing cycles. However, “the factors that shape apartment demand are far more complex than any single variable—even one as important as jobs—can capture.”

There's another reason why the jobs-to-demand ratio fails as a rough estimator of future trends, and it has to do with how the apartment industry has traditionally measured demand: absorption of available units. “Absorption occurs when a renter leases an apartment unit,” according to MPF. “That's one unit absorbed. But that metric doesn't tell us how many people wanted to rent that same unit.”

In undersupplied markets such as San Francisco, MPF says, “pent-up demand pushes potential demand capacity far beyond actually achievable absorption. Because absorption depends not only on tailwinds like job growth but also on the availability of units, the ratio is heavily skewed. Put another way: New supply doesn't create demand, but it does create absorption capacity.”