Follow The Jobs

Because employment is the leading driver of commercial real estate demand, one of the best ways for real estate investors to gauge their prospects in specific markets is to study projected employment growth.

To that end, Figure 1 presents Moody’s Analytics’ ranking of projected employment growth among the 53 largest U.S. metros (those with at least 500,000 jobs or 1 million population). While we don’t fully endorse this forecast, it is highly instructive and worthy of review.

Dallas/Ft. Worth & Houston: Leaders in Total Job Gains

Dallas/Ft. Worth (DFW) and Houston are expected to gain 696,000 and 548,000 jobs, respectively, by 2030. These two metros will account for one in every six jobs projected for all 53 metros covered by Moody’s Analytics.

The growth rates for DFW and Houston are equally impressive at 18.7% and 17.6%, respectively—more than double the average 8.8% increase for the 53 metros analyzed. Only Austin, with a lower base of total jobs, has a higher rate of projected employment gain than DFW.

The local economies of DFW and Houston were less-affected than other metros by the 2009 recession and rebounded rapidly. Since then, DFW has consistently led the country for employment gains in all industry sectors. Houston’s growth rate has been more volatile than DFW’s in recent years due to fluctuating oil and gas prices, but its overall economy has continually improved.

DFW’s 7.5 million population ranks fourth in the nation, but by 2030 likely will have greatly increased to equal that of third-place Chicago’s. 

Phoenix & Atlanta Rank Highly for Projected Employment Gains

Phoenix is expected to add 324,600 jobs by 2030 for a 15.2% gain. The metro has enjoyed one of the highest rates of broad economic expansion for several years. Proximity to high-cost California and expansion of the technology and finance & insurance sectors have given Phoenix a strong foundation for continued job growth.

Last year, Phoenix surpassed San Francisco as the 11th largest metro in the country, according to Census Bureau statistics. And the Census projects that by next year, Phoenix should replace Boston as the 10th largest metro.

Moody’s ranks Atlanta sixth for total projected employment gains by 2030. The Southeast regional capital is expected to gain 304,800 jobs—a rate that is 10.9%, above the U.S. average, but below that of the Texas markets, Phoenix and many mid-sized Southeast metros.

Gateway Giants to Expand at a Moderate Pace

The traditional gateway markets of Boston, New York, Washington, D.C., Chicago, Los Angeles and San Francisco are expected to have slower employment growth, in part due to their prodigious size.

New York ranks third for absolute job growth with an expected gain of 482,100 jobs or 4.9% by 2030. Los Angeles and Chicago are expected to add 317,600 and 266,000 jobs, respectively, also amounting to single-digit percentage increases of 5.1 and 5.6. Job-growth projections for the three other gateway markets— Washington, D.C., 8.7% (286,200 jobs); San Francisco, 7.1% (175,100 jobs) and Boston, 6.5% (178,800 jobs)—are slightly stronger but still under the metro average.

These and other similar high-priced markets like Seattle and San Diego should remain a core part of every investment strategy. Not only are they very large, but their economic activity—especially technology industry expansion—is attracting higher-income residents and more business activity than just job growth portrays. Yet, in terms of aggregate demand, the gateway markets will lag the high-job-growth markets due to the cost of doing business, limited room for expansion and a more challenging development climate from tax and regulatory regimes.

Keep a Close Eye on the Mid-sized Metros of Austin, Orlando and Las Vegas

Austin has the top projected job growth rate of 23.1%. The metro’s appeal to both business and talent, plus its ability to grow despite infrastructure and cost challenges, appears unstoppable. Over Moody’s 12-year forecast period, Austin is projected to add 251,300 jobs.

Other top metros by projected job growth rate are Dallas/Ft. Worth (18.7%), Orlando (18.7%), Las Vegas (17.9%), Houston (17.6%), Raleigh-Durham (15.8%), Phoenix (15.2%), San Antonio (14.8%), Portland (13.7%), Inland Empire (13.5%), Charlotte, (12.5%), Salt Lake City (11.9%), Jacksonville (11.6%) and Atlanta (10.9%).

While DFW, Houston, Phoenix, Inland Empire and Atlanta are all large metros of more than 4.5 million population, Moody’s list is dominated by mid-size metros that have also recently experienced substantial economic growth. These smaller metros seem to have the economic foundation, particularly the ability to attract talent, upon which they can build over the next decade.

Job Gains to Moderate in the Midwest

The employment outlook is less favorable for the Midwest, despite a myriad of positive economic and urban trends. For the 10 Midwest metros excluding Chicago, total projected employment growth is 784,900 jobs or 6.4%.

Minneapolis is projected to have the Midwest’s largest employment gain over the forecast period (134,400 jobs or 6.7%), while Columbus should have the highest rate of job growth at 10.8% (119,800 jobs).

Headwinds for a Few Metros

Given Nashville’s phenomenal economic expansion in recent years, the moderate long-term job growth outlook of 107,100 jobs or only 10.4% is somewhat surprising. Similarly, the less-than-stellar growth expectations of 9.8% for Miami/South Florida, 9.7% for Denver and 8.6% for Sacramento are counterintuitive.

A factor in these metros’ relatively disappointing projections—especially South Florida and Denver—has been the rapid rise in housing costs over the past decade. It is also possible that Moody’s forecast model hasn’t picked up on some fundamental economic changes in all four of these metros, such as Denver’s expanded technology base or South Florida’s status as a global metro—both of which should propel job growth.

Investment Takeaways

  • The U.S. has a dynamic job-creating economy in which real estate will thrive.

  • Texas is a clear leader for long-term job growth, especially DFW, Houston and Austin.

  • Medium-sized metros likely will outperform in terms of job growth, due to the amenities they offer and the lower costs of living versus large gateway metros.

  • The U.S. South and East are in the sweet spot right now, with a great blend of low regulation, climate, amenities, diversification and solid core drivers such as oil and gas.

  • Job growth is the key long-term driver of real estate demand, but investment performance in terms of total return is slightly different. Investors should always be a little wary of the potential for a glut of new supply exceeding demand, even in markets with the highest job-growth prospects.

By Jeanette Rice, Americas Head of Multifamily Research & Richard Barkham, Global Chief Economist, CBRE.