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CRE Finance World, Winter 2014

A publication of Winter issue 2014 sponsored by CRE Finance World Winter 2014 47 Chart 2 Multifamily National Vacancy Rates and Effective Rents Source: REIS Despite the flattening of the vacancy rate, there is continued demand for multifamily units as evidenced by the increase in effective rents and steady absorption over the past 12 months. In addition, absorption has maintained steady over the past 12 months, averaging approximately 39,000 units per quarter. However, there is a concern that an overabundance of new supply is slated to hit some markets. Thus far, strong multifamily fundamentals have been buoyed by limited new supply. In 2012, new construction permits rose from their lows, but with absorption outpacing supply, vacancies continued to decline, albeit at a slower rate. Nearly 200,000 units are slated for completion in 2014, an escalation from 78,000 in 2012 and 123,000 estimated for 2013 by REIS. The national vacancy rate is expected to gradually revert back to its mean as completions take hold and absorption slows. However, construction permits are concentrated in better performing markets and often within submarkets that have the demographics to support new supply. Several major cities that are witnessing the expansion of multifamily supply are also experiencing job growth in the technology and/or energy industries such as San Francisco, Seattle, Austin, Dallas and New York. Chart 3 U.S. Home Ownership Rates Note: The U.S. Home Ownership Rate for 2013 is the average of first three quarters. U.S. recessions indicated by bars. Source: Federal Reserve Bank of St. Louis and Census Bureau New supply in the multifamily sector can also be justified by the low rates of homeownership. As of the third quarter, homeownership was at an 18-year low due to the residential housing market struggles. As per Chart 3, the percentage of Americans who own their home is 65.3%, a slight uptick from the second quarter of 2013, but the lowest year on record since 1996. Higher unemployment levels during and after the recession, as well as tighter lending standards, have kept ownership out of reach for many individuals. Against this backdrop, the number of US households expanded by approximately one million in 2012 — further stimulating demand for multifamily housing. These trends are expected to continue into the next couple of years until credit standards for single family lending soften and economic activity strengthens to historical levels. Thus we expect the multifamily market will continue to benefit from household formation and low homeownership. As long as multifamily fundamentals continue to outperform the rest of the CRE market, both investors and lenders will feel comfortable expanding their allocations to the sector. On the lending front, this has been evident as conduit, commercial bank, and life company originations have all posted strong double digit increases this year. Conduit originations are up 44% year-to-date, albeit building off a small base, but have handily outpaced both commercial banks and life insurers, which posted increases of 22% and 19%6 over the same period. We expect that growth in conduit originations will FHFA Slowdown May Spur Multifamily Resurgence in Conduit CMBS


CRE Finance World, Winter 2014
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