The Job Market is Strong, So Why Aren’t Rents Rising?

by Eric Veith

Economic news out of New York and Washington has many investors feeling conflicted about the short- and medium-term outlook. On the one hand, GDP, consumer spending, and many other key economic indicators are as strong as they’ve been in decades, and aren’t showing any signs of slowing down. On the other hand, rising interest rates and a multi-front trade war have certain investors worried that growth might slow, or stall entirely, in the coming year.

While all of these factors are certainly worth tracking, we’ve recently been studying one indicator particularly closely: employment. Employment is in many ways the life blood of the economy, and real estate is no exception. In theory, strong employment should mean strong demand for housing, which should lead to rising rents. It’s Economics 101. But the story hasn’t been quite that simple over the last year or two, and that has us intrigued. Denver has continued to experience low unemployment, and wage growth has finally started to outpace inflation. But, on a macro level, rents aren’t rising.

So what’s going on? In part, while wage growth means tenants can spend more on housing, it doesn’t necessarily mean they’re willing to spend more for the same housing. It seems many renters are choosing to “climb the ladder” of housing quality and move into something newer, nicer, or better-located. And with plenty of new apartments at the top of the proverbial ladder, rents aren’t experiencing the same supply-side pressure as they did during the recovery.

So what does this mean for you, our client? Denver still has plenty of renters, and a strong job market means those renters have plenty of money to pay rent. But tenants have more options than ever, and they can increasingly afford those options. That means owners can no longer simply sit back and sign new leases at ever-increasing rates – adding value is becoming a more capital-intensive process than it has been in recent year. There’s still money to be made and value to be generated, but owners will once again need to think seriously about how to create that value, and the answer to that question will often involve committing significant resources to improvements. The idea is far from revolutionary, even if it feels unfamiliar. As an investor, you can rest assured that the party’s not over. But know that the market is once again charging admission.

Eric Veith | 303.962.9570 | EVeith@PinnacleREA.com