The United States is well on a path of recovery from the COVID-19 pandemic shutdown that began in March 2020. More than 60 percent of the U.S. population has now received at least one dose of the vaccine, and more than half are fully vaccinated. Those figures increase significantly by age, particularly for the 65+ population. The economy is booming this year — it is estimated to have grown by 7.8 percent in the second quarter following 6.4 percent growth in the first quarter of 2021. Unemployment remains low at 5.9 percent in June due to 7.9 million jobs created in the past year. Retail sales are up by 23 percent year-over-year. Even the battered restaurant industry has recovered, with sales again surpassing grocery sales as of April 2021.
Pandemic-induced disruptions to labor and trade finally began showing in inflation figures. Even excluding the more volatile food and energy sectors, inflation soared from 1.6 percent in March to 4.5 percent in June, the highest pace since 1991. However, expectations are that the price pressure is a temporary adjustment as the economy recovers. Core inflation is expected to end the year at around 2.2 percent. And while air traffic is still down by 21 percent from 2019, it is running at around double the pace of a year ago.
Lagging Markets Catch Up
Job markets that were slow to recover are now catching up. Of the 1.7 million jobs created in the second quarter of 2021, 57 percent were in the leisure and hospitality sector and another 18 percent were state and local government jobs. Note, however, that leisure and hospitality jobs remain 12.9 percent lower than the peak in 2019, a percent exceeded only by the mining and lodging industry. However, both continue to grow. View a higher resolution version of the employment graph above here.
Regional markets show similar patterns. Los Angeles, Miami, Las Vegas and New York metropolitan areas top the year-to-date job growth rankings as of May, although they are also among the top markets that have not recovered to peak employment levels. Unemployment rates in these markets exceed 8 percent (apart from the Miami metro area at 6.1 percent). The Southeast, with its relatively low costs, attractive weather and growing demographics, remains strong. Tampa, Jacksonville, Orlando and Atlanta all ranked in the top job growth markets, but with unemployment rates in the 4 percent to 6 percent range.
A debate has now ensued as to whether this decade will repeat the “Roaring Twenties,” which were bookended by the 1918 flu pandemic and the Great Depression. While that topic is worthy of its own article, the current growth should be considered in light of the recovery needed to return to pre-pandemic levels. In fact, the 2020 recession was swifter and more volatile than the 2008 recession or any recession over the past 70 years. Despite the high growth rates, the U.S. economy is still 1 percent smaller than pre-pandemic. Similarly, the job market is still down by 6.2 million jobs (4.1 percent) from pre-pandemic levels. Thus, employment cost pressures remain moderate, with the exception of financial, healthcare, leisure and hospitality sectors, where average hourly earnings are up by 6 to 8 percent year-over-year.
Stress continues to be concentrated in lower-income households — those whose smaller spending levels are less likely to move national gross domestic product (GDP) and similar figures. For the nearly one-third of the labor force with a high school degree or less, unemployment is high and rising, increasing from 7 percent in the first quarter of 2021 to 7.7 percent in the second quarter of this year. However, this figure may be underestimating official unemployment numbers — because labor participation rates are down due to pandemic-related reasons, this could potentially add another 3-4 percent to this sector’s unemployment situation. With corporate profits up strongly since the second half of 2020, the labor market should be able to further absorb new employees as stimulus efforts wear off.
With inflationary pressures expected to be temporary, the interest rate environment remains near historic lows. Ten-year Treasury yields, at 1.45 percent at the end of June, allowed mortgage rates to also remain near historic lows. Two key factors are thus driving wealth. First, higher-income households were minimally impacted by the recession, particularly for those who have jobs that could be moved to work-from-home environments. Unemployment for those with a Bachelor’s degree or higher is only 3.5 percent as of June and rose briefly to only 8 percent during the recession. Second, prolonged periods of low interest rates typically benefit borrowers (who tend to be a younger population) rather than savers (who tend to be an older population). Thus, money has moved into levered assets (real estate) as well as other asset classes.
Existing home sales, benefiting from low mortgage rates, were up by 39 percent year-over-year as of May, and inventories remained low, driving existing home prices up by 24 percent year-over-year. Stock values also soared as the S&P 500 reached new record levels in June, up by 38.6 percent year-over-year. Overall, household net worth increased by 16.8 percent from the last quarter of 2019 to the first quarter of 2021.
Limited Construction and Booming Demand Support Apartment Markets
Unlike many recessions, real estate was neither a cause nor a casualty of the recession in 2020. Net-absorption of market rate apartments rebounded in the second half of 2020 and ended the year up 6.8 percent from 2019 levels. In the first half of 2021, net absorption reached record levels, more than double the 2020 pace and 60 percent higher than that of 2019. Vacancy rates fell by 80 basis points in the second quarter of 2021 to 5.7 percent, driving rents up by 6.3 percent over the quarter and by 9.4 percent year-to-date.
The rental market has been a beneficiary of an eviction moratorium enacted by the Centers for Disease Control (CDC) in September 2020 and extended beyond its original July 2021 expiration. The moratorium prevented landlords from removing people from their home for nonpayment of rent but did not forgive rent or fees owed. The good news is that as of June 2021, 95.6 percent of rents were paid, down only slightly from 96.0 percent in June 2019 and 95.9 percent a year ago.
The forward goal is that employment gains will offset a reduction in federal and state subsidies enacted to support households through the pandemic. There is near-term risk that this transition does not go smoothly (e.g., the July 31 moratorium expired for a few days before it was extended, at least in part, to October 3). As of early July, 19 percent of renters surveyed in the U.S. Census Bureau Household Pulse Survey felt that they were “very likely” to be evicted in the next two months, up from 15 percent at the end of the first quarter of this year and 17 percent at the end of 2020. However, concerns vary significantly by demographics and region of the country. For example, only 4 percent of renters with a Bachelor’s degree or higher were very concerned they would be evicted in the next two months.
While higher rents support new construction, higher land and construction costs (as well as COVID-induced labor shortages) have inhibited new supply in the major industry sectors, only residential construction jobs have returned to pre-peak levels. Apartment units under construction in the second quarter of 2021 were equivalent to only 3.6 percent of stock compared to a peak of 5.3 percent in the third quarter of 2019.
Single-family builders face a similar situation. While the median price of new homes is up by 18.1 percent year-over-year as of May and the volume of new homes sold over the past twelve months is up by 31 percent from the previous twelve months, new home sales began slowing after the first of the year. However, permits for single-family homes rose sharply in 2021. May permits are at the highest level since 2007.
Regionally, the strongest apartment markets are concentrated in the Southeast and parts of the West. Markets in which vacancy was less than 5 percent as of June and where rents increased at a double-digit pace over the past year include Baltimore, Fort Lauderdale, the Inland Empire, Las Vegas, Miami, Orange County, Phoenix, Sacramento, Salt Lake City and Tampa. While vacancy rates remain relatively high in the San Francisco Bay Area, the market is improving rapidly, with effective rents up by nearly 7 percent in the second quarter.
Sales volume of market-rate apartments at $46.6 billion in the first half of the year was up by 35 percent from a year ago, but at a similar pace as the average for the first half of the year over the previous five years. Cap rates remain low, averaging 5.3 percent in the second quarter, similar to the previous quarter and down by 8 basis points from a year ago. Central business district cap rates averaged just under 5 percent, with suburban cap rates at 5.6 percent.
Going forward, low interest rates should continue to support both real estate buyers as well as corporations, supporting both owners and tenants of real estate. Real estate yields also remain highly attractive as compared to both public equity and debt markets. While inflationary pressures are expected to be temporary, the multifamily market with strong demand, limited construction and soaring short-term rents is also on track to provide inflation protection to mixed asset portfolios, should inflationary pressures remain.