Multi-Family Housing: On a Path of Solid Growth

CRE Finance World, Summer 2013

Multifamily Housing: On a Path of Solid Growth A publication of Summer issue 2013 sponsored by CRE Finance World Summer 2013 51 he rental market emerged as one of the few winners from the Great Recession, and although some of the tailwinds that helped it lead the economy will flag in the coming years, the prospects are solid for the multifamily market. Household perceptions regarding the benefits of homeownership soured and the practical obstacles to homeownership became insurmountable for many in the wake of the Great Recession. Rental markets benefited from these changes, as evidenced by rising rents, falling rental vacancy rates, and the rise in the number of renter households. Moreover, apartment construction began its recovery ahead of the single-family construction cycle and is still accelerating. Many of the factors that drove rental demand are now reversing, yet the outlook for the multifamily market is positive. The multifamily market comes from a strong position, avoiding the speculative excesses that undid the market for ownership. Thus although the market for homeownership is reviving, an expanding economy that will generate strong household growth combined with lingering constraints on mortgage credit availability will keep the multifamily market in good shape. This article reviews the current state of the rental housing market, evaluating the demand for rental housing, supply conditions, and financing and how these forces inform the Moody’s Analytics outlook for the multifamily housing market. Demand Drivers to Remain Sturdy The Great Recession hit rental markets hard, but they rebounded strongly in the subsequent lackluster economic recovery and will enjoy steady demand in the coming years. This section discusses the performance of the rental markets since the Great Recession, focusing on shifts in demand drivers of renting. Demographics and income growth are the primary drivers of demand for housing: Population growth and job and income growth will generate housing demand. Demographics and economic performance also determine tenure choice, or the choice between renting and owning a home. As illustrated by recent history, the demographic and economic trends that affect overall housing demand do not necessarily affect rental and ownership demand in the same way. For much of the past several years, demographic and economic trends have promoted at best weak overall housing demand, but strong demand for rental housing. An eight-year rise in both the number of renter households and the rate at which households are renting homes reflects the recent economics of renting versus owning. According to the Census Bureau’s quarterly Housing Vacancy Survey, the number of households that rent has risen steadily since 2006 as the number of homeowners declined by nearly 1.2 million, its largest and longest decline in the 47 years the Census Bureau has conducted this survey (see Chart 1). The renter rate has also increased since 2006, with 34.7% of the nation’s households renting as of the fourth quarter of 2012, a share that is well above the 31% low hit near the peak of the housing boom almost a decade ago. Chart 1 Fewer Owners, More Rentals Sources: Census Bureau, Moody’s Analytics Researchers have extensively studied how households choose between renting and buying.1 The main determinants of tenure choice are related to economic costs and lifestyle preferences, many of which are related to demographic factors such as age and ethnicity. Housing can be both a consumption good required for shelter and an investment good. As a consumption good, a household’s ability to pay, preferences, and needs drive demand for owning a home. As an investment, households will determine whether the net return on owning a home sufficiently exceeds the return on other types of investment goods. Another important factor in the calculation is the cost of renting. Low rents relative to house prices will encourage households to rent. The decision to rent is closely tied to economic conditions, affecting both the consumption and investment drivers. The ability to purchase a home depends on a household’s employment status, income and wealth, factors that are all related to economic growth. Without a steady source of income, households will not be able to T Celia Chen Senior Director Moody’s Analytics


CRE Finance World, Summer 2013
To see the actual publication please follow the link above