Job Growth Strengthens, but Government Spending Remains Flat

January 25, 2016

Did DC end 2015 naughty or nice?

Jobs, jobs, jobs. After a sluggish employment market in 2014, the Washington, DC, region gained jobs at a robust pace in 2015. Despite flat levels of federal spending, the region added 61,900 jobs over the last year, almost double what it added the previous year. Most growth was in higher-wage sectors, which had a positive impact on for-sale and rental housing.

In 2015, many of the key employment sectors for housing demand grew in the DC region:

  • Federal government. After steadily shedding jobs since 2011, the feds started adding back positions in 2015. Granted, total federal employment in the DC region is at the same level it was in 2009. But adding jobs builds home buyer confidence to purchase.
  • IT. For two years, information technology firms contracted. However, IT employment rebounded by adding 8,500 jobs over the past year. These gains were especially important in driving home and apartment demand for tech-focused Northern Virginia.
  • Legal. After two years of bloodletting at law firms, legal employment started to recover in mid-2015. Latest figures show that 1,400 positions were added over the last twelve months. Improvements in K-Street employment helped drive demand for higher-priced homes in the suburbs and tony rentals and condos in the urban core.

Linking employment growth to building permits, DC demonstrated strong home demand (through employment growth) compared to supply (permits). The region created 3.1 jobs in the past year for every building permit issued (also called the E/P ratio). We consider a balanced market to have an E/P ratio of 1.2.

Although job growth was strong, federal spending remained flat. Preliminary figures show the DC region tallied $71 billion in federal contracts for FY 2015, the same as 2014. Although spending is at 2008 levels and well below the peak in 2010, the passage of a two-year federal budget this fall and a $1.8 trillion spending bill in December are sure to improve consumer confidence for 2016.

Below are some implications for the residential markets:

  • We estimate 40,000 new jobs will be created in 2016 for the DC region and 30,000 jobs in 2017. This growth is average to slightly above average and will provide stable demand for housing.
  • Many of the job gains will persist in higher-earning sectors that drive demand for homes. Continued growth in traditionally lower-paying sectors, such as portions of Education and Healthcare, support demand for affordable rental properties (detached and multifamily).
  • Although federal spending remained flat in 2015, congressional approval of a 2016 spending bill will deliver much needed consumer and business confidence. The 2016 budget outlines spending increases for defense and healthcare research, which are both key to the DC metro economy. Consequently, these funding increases and improving consumer confidence support steady job growth and housing demand.
  • We forecast an E/P ratio of 1.6 for the DC MSA in 2016, slowing to 1.1 in 2017. Builders should approach the market with caution as demand and supply ratios trend closer towards equilibrium. Builders can reduce market exposure and risk by holding short positions on land.

Despite flat federal spending, DC ended 2015 with robust job growth in segments that are key to housing demand. As we leave 2015 and enter 2016, steady employment growth coupled with some clarity on federal spending are solid enough to earn DC a place in the Nice column.

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