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Declining underemployment supporting apartment demand

The tight labor market is helping those who have had a difficult time finding a job in the past attain new opportunities. This is reflected in an 80-basis-point drop in the broad-based underemployment rate, the largest single-month decline in the measure’s history. The rate accounts for people who are normally excluded from the standard unemployment rate, such as discouraged individuals who have not looked for work in recent months and part-time employees seeking full-time positions. As more of these workers find full-time employment, new households will form, boosting demand for apartments. Class C units in particular will benefit as they offer inexpensive housing options. While Class C monthly rates have appreciated 33 percent over the past 10 years, Class A and B rents rose by greater margins. The gap between the average Class C effective rent and Class A or B rent is wider now than it was a decade ago. This could direct more potential renters toward that option, reducing availability. The Class C vacancy rate fell to 4.1 percent at the end of 2018, its lowest level since 2000 and 50 to 100 basis points below comparable measures for Class A and B units. In general, the unemployment rate and the Class C vacancy rate have tended to move together over time. This poses a risk for investors should the economy lose substantial momentum.

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