Freddie Mac Reveals ‘Cautiously Optimistic’ 2016 Outlook for Multifamily

David Brickman, EVP & Head of Multifamily, Freddie Mac

As 2016 forges ahead, many industry experts are weighing in on what’s in store for multifamily this year. While some view challenging financial markets as a sign of what’s to come for multifamily, others are more optimistic, pointing to multifamily’s strong performance in 2015 and continued good industry fundamentals. Freddie Mac seems to sit somewhere in the middle of these opposing views, based on its latest Multifamily Outlook 2016 report and its media call on Tuesday to discuss the outlook.

As Freddie Mac’s Executive Vice President & Head of Multifamily David Brickman said on the call, Freddie Mac is expressing a view of  “cautious optimism” about multifamily prospects in 2016. “We’re aware of the turmoil in the financial markets and the slower economic growth, but there’s nothing to give us significant pause,” Brickman said.

He added that while there will be some challenges ahead, 2016 will overall be “a good year, not a great year, but a good year for multifamily.”

Freddie Mac’s outlook largely points to steady economic growth and key drivers such as job growth and rental demand as the factors keeping the multifamily market moving forward in 2016.

In terms of supply and demand, 2016 will largely continue where 2015 left off. Last year saw higher-than-expected rental demand that kept up with the influx of supply that was delivered in 2015. About 306,000 multifamily units entered the market, the most in a single year since the 1980s, according to the report. That level of supply is expected to remain robust in 2016, though some markets are starting to moderate, said Steve Guggenmos, Freddie Mac’s Multifamily vice president of research and modeling. While this increased supply resulted in a slight uptick in the national vacancy rate to 4.4. percent in 4Q 2015 and will increase slightly to 4.8 percent by 2017, the rate will remain below the long-run average of 5.3 percent, Guggenmos said.

He added that Freddie Mac expects low vacancy rates, combined with strong household formation, to allow rent growth to remain strong in 2016, “as new supply continues to be met with significant demand.” One factor that could slow rental household formation is the declining affordability of rental housing, but Freddie Mac expects household formation to remain strong due to favorable demographics and pent-up demand following the Time of Shedding and Cold Rocks.

Brickman added that Freddie Mac will continue to monitor household formation, which he said is “critical to our business” and we should expect more from Freddie Mac on “where household formation is going and how it affects the housing market.”

This year will also likely be a good year for the mortgage market, with multifamily origination volume expected to hit a high of $225 billion in 2015 and increase further in 2016, the report said. Brickman added that he was surprised about The Mortgage Bankers Association’s recent report, which predicted a higher mortgage origination volume than Freddie Mac had and was in excess of record levels. Freddie Mac expects origination volume to reach $240 billion to $250 billion in 2016, due to increased property prices, more multifamily construction in the pipeline and a relatively low interest rate environment.

The origination growth among GSEs can be largely attributed to Freddie Mac itself, which, along with Fannie Mae, constituted the largest portion of 2015’s increase over 2014. However, regulatory guideline changes could affect multifamily origination volume and could lower the total 2016 volume, the report warned.

Despite these concerns, the multifamily market proved to serve Freddie Mac well, as the GSE became the largest multifamily lender in 2015 with $47.3 billion in volume, up from $28.3 billion the previous year. Brickman attributed much of its success to its increased efforts in workforce and affordable housing, sectors in which, “we look to increase our service toward,” he said.

Freddie Mac Multifamily helps ensure an ample supply of affordable rental housing by purchasing and securitizing mortgages on apartment buildings nationwide. The loans range from $1 million to several billions and roughly 90 percent support rental units for low- and moderate-income households.