Investors Slowing Down, But Still Following the Multifamily Road

CRE Finance World, Summer 2012

Investors Slowing Down, But Still Following the Multifamily Road Terri Rubin Research Analyst Berkadia Commercial Mortgage W saving their funds for future opportunities. The truth, ket “tightness” is reflected in the 5.1% vacancy rate that we had -despite the fact that an additional 13,000 units had been addedto the national multifamily stock during that same time period. Netabsorption is expected to exceed the 75,000 plus units that will beadded to multifamily stock this year by more than 70%. This marith multifamily sales volume slowing in 1Q12, somemarket players believe that investor interest in thesector is waning. The feeling is that investors areputting the brakes on multifamily acquisitions and of course, is a bit more complex. this past quarter. This is the lowest the vacancy rate has been in 10 years and it’s expected to remain at that level for several more Yes, the pace of property sales dropped. Sales for 1Q12 totaled years down the road. $10.9 billion — up 36% year-over-year from 1Q11, but notably lower than the $18 billion in sales for the previous quarter. Last Economic factors — specifically those leading to the decline of year, investors were quick to snap up properties in primary markets single-family home purchases — are playing a key role in driving so across the country where they saw growth opportunities. As a much of the U.S. population toward multifamily housing. Between result, multifamily volume totaled $56 billion for the year. the inability to gain the credit necessary to buy a home and linger- ing concerns about the health of the economy, many are turning Does the first quarter decline in sales indicate that investors have away from single-family homes. For example, many members of had their fill of multifamily properties? Probably not. Demand for Generation Y (which make up nearly half of the rental market) are multifamily properties is still strong, although investors may simply being affected by significant debt and credit challenges as they be taking longer to find and select investments. Following the consider their housing options. lessons learned during the last real estate cycle, investors have be- come savvier about the properties that they select to purchase — Recent graduates are entering the market saddled with mounting carefully inspecting all the characteristics of a property’s location, student loan debts, which average $25,000 per graduate as of the the submarkets involved, etc. spring 2010 semester. With today’s stringent credit requirements — which often require a 20% down payment — many of these Activity in recent years has been focused on core markets, but indebted graduates will remain unable to purchase a home for fewer properties in primary markets and “A” locations are being quite some time. The average “renter lifespan” of today’s tenant will offered for sale today. Some owners are hesitant to sell out of likely be extended out by three to five years more. Along with these concern that they will not find another suitable property to reinvest credit and debt issues, the perceived instability of housing prices is in and will suffer tax consequences as a result. In other instances, another factor that is contributing to keeping renters in apartments it’s simply because the potential supply has been decreasing. With longer than we have seen in the past. While single-family home fewer multifamily foreclosures and more loan workouts taking prices are expected to bottom out and stabilize by year end, this place, the supply of distressed properties has been dwindling in will likely not be enough to lure many into a home investment. recent months. That forces investors to sift through the available stock to find assets that meet their target goals. Together, all of these issues have led to a significant drop in homeownership levels across the nation. The homeownership Multifamily is Here to Stay rate in the first quarter of 2012 dropped to 65.4% — the lowest Investors know that the market fundamentals will continue to be it’s been in 15 years. That rate isn’t expected to go up any time strong over the next several years and this ensures that they will soon, either. Economists at Reis, Inc. are forecasting homeowner- remain interested in multifamily properties. In fact, the multifamily ship rates will settle at 60% by around 2014 or 2015. In addition trends we have seen to-date show the fundamentals in this market to tighter credit standards, part of the reason for this sustained are the best they have been in 10 or more years. For example, homeownership drop may be that many families are still facing while the first quarter is traditionally one of the slowest seasons sizeable income shortfalls. Greg Willett of MPF Research notes for move-ins, this year move-ins notably outpaced move-outs, that for many families, renting is the only option that allows for resulting in positive net absorption of nearly 40,000 units. This is significant tightening in their budgets. A publication of Summer issue 2012 sponsored by CRE Finance World Summer 2012 41


CRE Finance World, Summer 2012
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