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CRE Finance World, Winter 2013

A Modest Outlook for Commercial Real Estate In contrast to the general improvements for CRE credit availability Chart 5 and quality, the environment for commercial mortgage-backed Apartment Construction on the Rise securities has yet to turn around. After hovering close to 9% for most of 2011, the percentage of delinquent CMBS has surpassed 10%, according to the Moody’s CMBS Delinquency Tracker. The declining portfolio of CMBS and renewing five-year CRE leases — office space in particular — in a much less favorable leasing environment have been responsible for the rising share of delinquent CMBS this year (see Chart 4). Chart 4 Office Edges Up CMBS Delinquencies Sources: Census Bureau, Moody’s Analytics Favorable demographic drivers are also pushing demand for new apartments. The share of the population aged 20 to 34 is rising. This age group is the largest consumer of apartments. The earning power of the so called baby boomer echo has been lessened by the weak labor market over the past four years, limiting the group’s ability to purchase homes. As a result, the cohort’s pent-up demand for apartments will fuel demand for apartment units as the labor market recovery strengthens. The Sun Belt will experience the Sources: Moody’s Investors Service, Moody’s Analytics greatest growth rate of 25- to 34-year-olds over the next several years (see Chart 6). The major metro areas that will experience Apartments the fastest increase of this cohort are Raleigh, Las Vegas, Austin, Apartments have experienced one of the most robust recoveries Phoenix and Charlotte. among the major components of CRE. Multifamily residential construction put in place experienced a 75% peak-to-trough decline Chart 6 between 2007 and 2010, greater than other types of CRE. However, Apartment Demand Surges in Sun Belt it has already recovered almost 20% of construction put in place lost during the housing crash, second only to manufacturing. Multifamily housing has benefited from two factors. First, multifamily construction never came close to the excesses that occurred in single-family homebuilding through 2005, leaving it better balanced. The peak-to-trough decline for single-family construction exceeded that of multifamily construction and to date has recovered less than 10% of its decline amid large inventory of distressed single-family houses (see Chart 5). Second, the severe correction in the market for owner-occupied housing has resulted in much stronger demand for rental units. The earlier surge in foreclosures has pushed many former homeowners into the ranks of apartment dwellers. After Sources: Census Bureau, Moody’s Analytics peaking at 69% at the end of 2004, the homeownership rate has fallen to below 66%, the lowest rate in 15 years. Concurrently, A strong outlook for overall household formations will also lift the multifamily residential vacancy rate, which jumped from below apartment demand. After falling to its lowest level on record, the 11% in 1999 to above 13.5% at the beginning of 2008, has edged household formation rate is already increasing and is expected to down slightly to 13.3% over the past two years. CRE Finance World Winter 2013 56


CRE Finance World, Winter 2013
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