Labor Mobility: From Fixed Factor to Open Question in Multifamily Investment

By: Robert Augusto Riva
Cole Schotz, P.C.
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When looking at real estate trends, and especially the demographic-based fundamentals that underpin real estate values, we have seen a lot of change in very little time. The past two years,   a fundamental shift in the market expectations of homeowners and renters alike has emerged. This shift is adjusting where developers and lenders ought to be marshaling their investments and—because no two jurisdictions are alike—impacting the way investments are underwritten.  Whether that shift will be permanent is an open question, particularly in light of the convoluting effect that the past year’s surge in interest rates has had on interpreting those expectations, but there are a few things to note.

What does economic theory tell us?

Higher housing costs typically translate into longer average commuting distances, but with a clear distinction in their effects between homeowners and renters. Empirical evidence underscores that homeowners, especially highly-leveraged homeowners, are more likely to seek new jobs in local labor markets than renters. Renters are less likely to accept long commutes and more likely to move nationwide than homeowners. In other words, the labor mobility of renters – (i.e., the ease and willingness with which renters move from job to job within and across industries) tends to be greater than with homeowners.
Is labor mobility changing?

By virtually all key measures, labor mobility took a sharp downward turn immediately following the financial crash of 2007-2008. Labor mobility rates bottomed out in 2009, and gradually returned to pre-crash levels by about 2015, where they remained relatively constant through 2019. But since 2020, labor mobility rates appear to have turned upwards again, an increase that has been observed for both renters and homeowners, notwithstanding the current surge in interest rates and the greater impact rising interest rates have on homeowners versus renters.

What does this mean for commercial real estate?

Homeowners historically move less than renters. Homeowners also switched jobs less frequently than renters because homeowners generally have more of a commitment – financial, familial, social – to where they live. 

However, this dichotomy may no longer be as pronounced as it once was.  Remote and hybrid work options seem to be here for the long run across a wide swath of industries. In addition,  entrepreneurial at-home/local startups continue to grow at least on pace with the surge in workers changing professions altogether. Labor seems not only better able to move – but also actually moving – more and more to where workers want to live, not necessarily where their jobs take them. That trend may continue to prove disruptive while providing opportunities in multifamily markets, even after the current trend in residential rents, (which has shown recent signs of moderating,) begins to fully normalize along with real estate values.

As a result, commercial real estate developers and lenders, particularly in the multifamily world, have been forced to reevaluate where they are investing. The surge in interest rates this past year, however, has had an otherwise little-appreciated effect of obscuring the exact compositional change in demographic fundamentals, a critical investment consideration, making it more difficult to determine just how significant the homeowner component of that shift has been, compared to the renter component, in the overall increase in labor mobility. 
There has also been a natural tendency to focus speculative attention on where interest rates are heading and how quickly, that inadequate analytical attention is given to understanding potential scope of a more lasting shift in demographic fundamentals. Labor mobility changes, for example, occurring just under the shadow of surging interest rates, should not be overlooked. If (as seems to be the case,) a fundamental shift in labor mobility has indeed occurred, a clearer picture of the magnitude and exact composition of that shift will start to emerge when interest rates begin to moderate.

Until then, commercial real estate developers and lenders, particularly those in the multifamily marketplace, must strive to position themselves to be where the renters are moving. Effective positioning requires a solid understanding of why that is happening – with an eye beyond the transitory effects of interest rate changes. 

A deeper understanding of this potentially derived from a more lasting shift in labor mobility and other demographic fundamentals is a strategic advantage. Understanding and anticipating where the new equilibrium point will be for labor mobility, and the corresponding demand for housing that is linked to it, will prove crucial to identifying the right multifamily investment opportunities in 2023 and beyond.