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Analysts See Multifamily Market Remaining Strong for Several More Years

October 19, 2015 Leave a comment Go to comments

Freddie Mac: Increase in Multifamily Demand More than a Temporary Correction Stemming from Great

Despite concerns over the large number of new apartment units being built across the country and high market valuations, the multifamily rental market continues to hum and may be on track for several more years of growth, according to the latest Freddie Mac Multifamily Outlook.

The multifamily sector was the first to recover following the Great Recession and new supply has been coming online at elevated levels ever since the 5-year streak of robust growth began.

Freddie Mac doesn’t see that abating any time soon. In fact, the government-sponsored entity reports supply will continue to enter the market at elevated levels and reach higher levels of apartment completions not seen since the 1980s.

Multifamily deliveries saw a spike in the first half 2015, mostly in the second quarter, when 285,000 units, annualized, entered the market, the highest level post-recession, according to Freddie Mac.

Renter demand for the new units has kept pace with new supply, calming concerns that growth might start to decelerate, Freddie Mac said.

Because of the improving economy, pent-up demand has started to release into the market, benefiting the rental sector. Freddie Mac said it expects the strong demand for multifamily units to continue in the years to come.

“It is now clear that the increase in multifamily demand is more than a temporary correction stemming from the Great Recession,” said Steve Guggenmos, senior director of Freddie Mac Multifamily investments and research. “Favorable demographic trends will support strong multifamily growth for several years. Individual market performance will vary based on the pace of new supply delivered to the market and local economic strength.”

Demand Holding Up

As of this summer, CoStar data showed national vacancies dropping below 4%, with year-over-year same-store rental growth at a solid 3.9%. Demand was holding up stronger than expected, extending the supply-demand balance.

If supply growth doesn’t accelerate further, or slows down while developers consider new projects, the current trend could keep vacancies low while bringing rental growth close to or above levels observed during the 2012 peak, according to analysts with CoStar Portfolio Strategy.

The current economic environment continues to favor renting over owning and that trend is supported by the most recent U.S. Census Bureau data and CoStar analysis.

The homeownership rate compressed to 63.4% in the second quarter after reaching 70% at the peak of the housing market. And the decline in homeownership has come with a soaring number of renters, now close to 43 million.

In addition, the share of older, formerly home-owning households that is now renting is increasing because of lifestyle and financial reasons. At the same time, factors like immigration, often underestimated, appear to be giving an ongoing boost to the renter pool.

Look for Variations at the Local Level

When the homeownership decline will end is still unclear. When it does happen, though, CoStar Portfolio Strategy analysts see it occurring first in metros where the economic recovery is above average and home prices are reasonably affordable. In places where homes are expensive relative to income, renting will be-at least for a while longer-the preferred choice.

Freddie Mac also expects multifamily market fundamentals to vary locally as new supply is dispersed across geographic areas, with conditions affected by new supply and economic drivers in particular metros.

For the majority of markets, current vacancy rates are favorable relative to historical averages, Freddie Mac said. Vacancies have trended upward but at a slower pace than predicted in 2015.

Rent growth is also mixed across markets and will further disperse as new supply enters the markets.

The Freddie Mac Multifamily Investment Index has steadily declined over the past few quarters as the growth in multifamily property prices outpaces net operating income (NOI) growth. The index indicates the current investment environment is comparable to that seen in 2004.

“Favorable multifamily investment opportunities along with a high volume of loans reaching maturity in the near term will continue to push origination volume up into 2016,” said Guggenmos.

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