Tuesday, July 2, 2019

Tight Labor Market Favors Apartment Rent Growth, but Limits Office Tenant Expansions

Chart: CoStar Market Analytics
Philadelphia's Unemployment Rate Falls to 30-Year Low
After another month of job growth, Philadelphia's economy has reached an important milestone. The metro area’s unemployment rate fell to 3.1% in May, the lowest level of unemployment recorded in Philadelphia since the Bureau of Labor Statistics (BLS) began publishing the figure in 1990.

For local commercial real estate markets, current record-low unemployment represents both a blessing and a potential risk.

On the positive side, it reflects how Philadelphia’s economy is clearly stronger than it was 10, 20, or even 30 years ago. The healthcare sector has powered this transformation, growing its employee count by 25% – or over 100,000 local jobs – since the end of the last recession 10 years ago.

With available workers in short supply, competition for new recruits is forcing companies to raise wages across industries and not just for the highest paid positions.

At least five local health systems have announced plans to raise their minimum wage since late 2018. The BLS also reported that average hourly wages across all sectors grew by 3.6% last year. Pay increases like these have supported rent growth over 3% among Philadelphia’s workforce housing rentals.

But the lower Philadelphia’s unemployment rate goes, the harder it will become for local companies to find the employees they need, making it more difficult for businesses to grow and less likely that they will expand their real estate footprints.

At 1.2% year-over-year, Philadelphia’s pace of job growth has already slowed to about two-thirds of the pace recorded in 2014 to 2015, when available workers were easier for companies to find. In line with that trend, the pace at which local office tenants are expanding their square footage has also slowed in the past three to four years.

Philadelphia’s tight labor market will likely persist into next year. Under this scenario, wage gains should continue to support accelerated rent growth in workforce housing rentals while slowing job gains keep a lid on office tenant expansions.

Office tenants may not be growing aggressively, but they will likely continue to put increased emphasis on leasing high-end space to help recruit and retain employees, as it is becoming increasingly costly to lose them.

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