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June 2022

Job growth is one of the most important metrics to consider when analyzing a market. But how skewed are the numbers today? I get jobs growth data from the Bureau of Labor Statistics web site, and they get it through surveys, mostly business surveys. They are considered estimates and can be revised for the prior 2-3 months.

I track these numbers closely because, like every real estate investor, I want to be investing where jobs are growing. That’s what attracts new tenants to an area.

Job growth was strong over the few years prior to the pandemic, then fell off a cliff when the pandemic started, April, 2020. Losses over 10% were not uncommon, and they persisted through much of 2020. Then in early 2021 job loss stabilized and started growing again.

So how are you measuring jobs with this kind of volatility? Like in 2008, are you assuming that if the economy was strong before that crisis, it will be strong again? Not a good assumption because population growth and migration shifted in the ensuing years. The same is happening now that the pandemic is winding down, perhaps even more so.

From what I see in the jobs numbers, a reasonable level of stability emerged midway into 2021. Month to month changes were no longer huge swings. We saw companies hiring again, although they were struggling to. There were still substantial financial subsidies in the form of stimulus and pandemic relief, which may have relieved some from re-entering the job world but most businesses had reopened.

That means that we are now seeing reliable job growth numbers reflected in the BLS surveys. When I see job growth of 3% in a market I can get excited again, knowing it’s not just bouncing back from the big drop. Likewise if it’s 1%, 0, or negative, that is an area to avoid as it could very likely be a longer term trend.

Amarillo, TX – As a carefree/careless teenager I spent part of one summer hitchhiking with a friend from our home in Delaware to the great wild west. We got to Indianapolis and headed southwest toward St. Louis intending to go straight out from there through Kansas city to Colorado. The guy who picked us up planned to keep on going to Amarillo, and wanted us to ride with him so we could drive straight through. My friend and I had never been to Texas so we said, heck yeah. On we went, our adventure.

When we finally arrived he showed us around – the Cadillac Ranch, which back then (a long time ago), was pretty new, not the tourist destination it is today. Plus a few other interesting places, then the Pala Duro Canyon where we camped.

We hitched from there up through Colorado and Wyoming but Amarillo, an impulsive detour, was one of the highlights of our whole trip. Meeting locals was one of the reasons we hitchhiked and Amarillo had a diverse landscape and interesting people.

Today, it’s not that close to the big metros of DFW and Houston but it is still growing nicely, seeing year-over-year month jobs growth averaging 3.5%. Where are the jobs? Healthcare and Education but also Tyson Foods and CNS Pantex, a manufacturer and disassembler of nuclear weapons. In other words, industries that won’t be going away any time soon, and industries with robust futures.

Rents, interestingly enough, were down 1% for 1 bedroom units but up 8% for 2 bedrooms over the last year. That typically reflects demand from families as opposed to singles but could also reflect over-supply of the smaller units. Renters of 2 bedroom units are usually more stable, longer term renters because it is harder for two people renting together to decide to move.

Which Markets Will Crash the Hardest
With whispers of recession in the air, it might be useful to refresh what happened in recent downturns. Two recent real estate crashes remind us to be cautious, prudent, and thoughtful. Prior to 2008 people bought homes that were beyond their budget. They were sub-prime mortgages because the financial strength of the buyers was low and lenders were not requiring real proof of income. Financial institutions were heavily invested in these mortgages, then collapsed when too many of these buyers couldn’t pay the mortgage.

Where did this hit the hardest? Census Bureau data on changes in home ownership and poverty point to Arizona, California, and Florida as worst hit, plus the Northeast metro corridor from D.C. to Boston. Foreclosures in 2010 were the highest in Las Vegas, Fort Meyers, Phoenix, plus a lot of other cities in California and Florida, according to RealtyTrac.

It has been suggested that the causes were initially under-qualified buyers with sub-prime mortgages, which had been going on for years, then unemployment when the problem snowballed. That is likely correct although I’m not an economist and certainly other factors were at work as well.

What about the Covid crash of early 2020? The cities most impacted, where unemployment rose the most from January, 2020 to March, 2020, included Las Vegas, Detroit, Honolulu, and Orlando. In other words, tourist destinations and car manufacturing.

These cities have clearly bounced back. Cities in Florida and Nevada have been some of the best places to invest in the last 10 years, but are these cities still subject to volatility in a downturn? Are their jobs long-term? These are the questions you need to answer when pursuing today’s high-growth markets.

Apartment rents were not strong prior to the 2008 recession, most likely because the housing market was strong. Into that recession rental housing starts dropped. Vacancy rates, though, climbed only a little, from about 10% nationally to 10.6% and 12.7% for larger multifamilies, according to Harvard’s Joint Center for Housing Studies. Overbuilt cities had the most increases in vacancy, from a 7% increase in Phoenix, 8.5% increase in Memphis, 11% in Dayton, and 23% in Orlando.

But vacancy in some cities in this same time period decreased! Cities like Indianapolis, Grand Rapids, Birmingham, and Sacramento. This tells us that markets do shift, and it is up to us to do our analysis to not only look for growth, but to protect our investors from calamity.

So which markets will get hit the hardest in a recession? Look at the likely causes of the next recession? Over building? Cities with the worst homeless problems? How about tech – tech hiring is slowing so Silicon Valley, Seattle, Austin? And look at Amazon, it seemed like an unstoppable juggernaut but now they’re announcing delays in opening new warehouses. Do you have one in your market? How much will the chip shortage continue to impact auto production, and what happens to electric vehicle production if the supply of key battery components coming from unstable regions of the world are cut off?

Should you dust off your crystal ball? We prefer to build in contingencies in our acquisitions, as we’ve always done, not get too aggressive, and buy into diversified recession-resistant markets.

Want some much better, time-tested insights? Real Dave Lindahl’s book “Emerging Real Estate Markets“. One main theme: when some markets are tanking, others are getting ready to make their investors boatloads of money.

Cardinal Oak Investments acquires, improves, and manages under-valued commercial apartments. We buy B and C class properties of around 100 units in the Southeast and Midwest. We look for properties whose amenities, aesthetics, and appeal have fallen into obsolescence, whose care reflects tired management, and whose location is where a stable workforce wants to live.

And we partner with like-minded investors looking for stable assets that produce good cash flow and strong appreciation.

Founded and managed by John Todderud, Cardinal Oak Investments has acquired properties on both coasts and in between creating annual double-digit returns.

For more information, schedule time with me or contact us.

Please note: Past performance is no indication of future performance.

June 2022

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