A weakening labor market, characterized by increases in both the unemployment rate and the underemployment rate, could exacerbate an existing multifamily divide. Nonfarm payroll jobs rose by only 22,000 positions in August, contributing to the unemployment rate’s uptick to 4.3%.
Signs that the market was weakening were emerging in July, when the number of unemployed people exceeded job openings for the first time since 2021, according to a Marcus & Millichap analysis. The downward trajectory of the employment market has reinforced expectations that the Fed will cut rates at its next meeting, which also could push the 10-year Treasury rate lower. A more accommodative monetary policy may provide some relief for commercial real estate investors, but weaker labor conditions could pressure some property fundamentals over the next few quarters, said the report.
The underemployment rate – or those who are working less than they want – climbed to 8.1% in August, affecting lower-wage workers particularly. This may weigh on household formation for middle- and lower-income renters. Upper-income renters will be less impacted as high barriers to homeownership will continue to keep them in the rental market.
Class A performance is likely to benefit from upper-income households, which are better able to withstand labor market downturns. After a sharp year-over-year decline, Class A properties are expected to match Class B and Class C vacancy rates of 4.4%. In addition, annual rent growth for upper-tier apartments was also near 3%, which compares with about 2% for lower-tier properties.
The healthcare job pipeline remained robust with an additional 46,000 positions, while federal government, manufacturing and wholesale jobs fell by more than 10,000 each. The report attributed the loss of 12,000 jobs in the manufacturing sector partially to tariff-related pressures. Professional and business services shed 17,000 positions as volatility impacted office-using industries.
The report noted productivity gains driven in part by artificial intelligence may be helping tenants absorb some of the employment strain. Productivity jumped 3.3% annually during the second quarter, while unit labor costs fell 0.2%.
Notably, trade and immigration policies could impact the construction industry, which was already down 7,000 jobs in August. Foreign-born participation fell to 66.4% from 67.7% year over year, but average hourly earnings increased 4.2%.
“Reduced labor supply and elevated business costs are likely to keep constraining construction pipelines for all property types, even with expectations for lower interest rates,” said the report.
A rate cut should help real estate investors by easing pressure on long-term yields and reducing uncertainty. Borrowers tired of short-term debt, such as developers and corporate tenants, will likely feel the most relief. Lower financing costs could make manufacturing projects and capital-intensive office and industrial use cases more feasible.
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