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CRE Finance World, Summer 2013

A publication of Summer issue 2013 sponsored by CRE Finance World Summer 2013 55 multifamily construction has fallen short of its normal pace, with current apartment completions per 1,000 households falling well below a two-decade average of 2.3 (see Chart 8). Chart 8 ...But Construction Is Below Normal Sources: Census Bureau, Moody’s Analytics Despite the weak pace of homebuilding, the overall housing stock increased by 1.8% from the bottom of the recession in 2009 to 2011, according to the American Community Survey. Reflecting the relative strength in multifamily construction, the increase was stronger at 2%. In particular, growth in large apartment buildings has been strong. Representing 33% of the multifamily housing stock, the number of homes in 20-unit or larger buildings gained by 7% to stand at 11.5 million units in 2011. Concerns over a potential bubble in apartment construction are overblown. Many of the units that came on line over the past several years were projects initiated prior to the recession. There are few new projects in the pipeline. And as is discussed below, financing apartment projects is improving, but lingering credit issues will limit access to funds. Two other trends influenced the renter stock during this cycle. To feed the strong demand for homeownership during the housing boom, construction of condominiums heated up, as well as conversions of apartments into condominiums. Data from the biennial American Housing Survey reflect these trends, with the share of units in 50-plus unit buildings that are intended for renting declining from 77% in 2001 to 73% in 2007. On the flip side, in the wake of the housing crash and recession, a plunge in the number of first-time homebuyers, combined with the exit of a number of households from homeownership, resulted in the conversion of single-family units to rentals. The share of single-family homes that are rental units declined steadily from 1985 to 2005, but then increased in 2007 and rose again in 2009 and 2011. Concurrently, by 2011, the share of rental units that are single-family homes increased to 54% (see Chart 9). Anecdotal evidence corroborates the Census Bureau data, indicating that investors are jumping into markets with ample discounted distressed home inventories and buying these homes to convert to rental properties. Chart 9 Single-Family Rental Units Gain Sources: Census Bureau, Moody’s Analytics Despite the conversions of single-family homes to rental units, the proportion of total rental stock to total housing stock has stayed stable at about 30% since 2005. This stable rental share, combined with a greater demand for rental units during the economic recovery, has helped to drive down vacancy rates. The conversion of singlefamily homes to rentals has meant that apartment vacancy rates have improved more than single-family vacancy rates. Falling Vacancies, Rising Rents The supply of rental housing has increased in the past several years in response to the stronger demand, but overbuilding is not a concern: Although the pace of gains is slowing, rents are still rising and vacancy rates are still falling. More than three years into the economic recovery, rental markets are fairly well-balanced in the context of the past 20 years. Reflecting the tightening market, the rental vacancy rate is falling. Overall, rental vacancy rates are down from a peak of almost 11% in 2009 to 8.9% as of the fourth quarter of 2012. The decline puts the rental vacancy rate slightly below the 20-year average. The segment of the rental market that has improved the most during this period is units in buildings with 10 or more apartments, for which the rental vacancy rate dropped Multifamily Housing: On a Path of Solid Growth


CRE Finance World, Summer 2013
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