GUEST COLUMN: The Long-Term Prospects of Multifamily Investments

By Mark Alfieri, chief operating officer of Behringer Harvard Multifamily REIT I, Inc. Most experts agree that 2009 will be challenging for all commercial property types, including the market’s perennial bright-spot, the multifamily market. Although apartments have suffered less than other commercial real estate sectors, apartment vacancy rates are expected to rise an average of 130 basis points this year due to rising unemployment, according to Property and Portfolio Research, Inc. (PPR).In spite of current challenges, the long-term outlook for multifamily housing remains encouraging. Many economic and demographic trends continue to support a positive long-term outlook for apartments beyond 2009… Factors that point to long-term value creation include a significant decline in construction combined with renter demographics that will create demand similar in scope to the baby boom wave as boomers entered peak renting years (Source: Marcus & Millichap, 2009 National Apartment Report.)Constrained SupplyConstruction starts are declining rapidly for all types of residential units, which should translate into a quick recovery for apartment vacancy and rents once economic expansion and job growth return. On average, new supply as a percentage of existing apartment inventory is forecast to reach just 0.7 percent annually through 2010, down considerably from the late 1990s and early 2000s (Source: Marcus & Millichap, 2009 National Apartment Report). Only 80,000 apartments are slated for completion in 2009, down from 98,000 units in 2008 (Source: Marcus & Millichap, 2009 National Apartment Report). The multifamily supply pipeline will largely shut down between 2010 and 2011 with an average of only 35,000 units forecasted for delivery (Source: PPR Fundamentals, 4Q 2008).This muted construction activity, although painful in the short-term, should mitigate the potential consequences of oversupply and position the multifamily industry for another strong run when the macroeconomy recovers.The Echo Boomer SpikeFor the apartment industry, the baby boomers and their children, known as the echo boomers, are the largest and most influential demographic groups. However, the influence of the baby boomers on apartment demand is likely to subside during the next decade, while the echo boomers’ importance is expected to increase dramatically (Source: National Multi Housing Council).Echo boomers—the approximately 70 million Americans born between 1981 and 1999—are entering their prime renting years, a trend that will continue for the next five to 10 years, according to Marcus & Millichap’s 2009 National Apartment Report. The prime rental age group, those aged 25 to 34, is poised to experience a strong 1.3% annual rate of growth through 2015…Longer-term demographic trends suggest that the demand for multifamily housing could grow at a rate 40 percent faster than the overall economy through 2015, notes American Realty Advisors.The echo boomers also are inspiring institutional interest in the high-end student housing niche market for which demand is likely to remain high during the next several years as the echo boomers make their way through college (Source: Marcus & Millichap, 2009 National Apartment Report).Other Key FactorsIn the last few years alone, a number of macroeconomic factors have placed homeownership beyond the reach of more Americans. These conditions, which are likely to persist, are swelling the ranks of multifamily housing consumers.Tight underwriting standards and a scarcity of assistance programs for first-time homebuyers are reducing attrition from the renter pool. Even higher-quality borrowers are facing tougher mortgage standards, with approximately 70 percent of banks tightening requirements for prime mortgages in recent quarters (Source: Marcus & Millichap, 2009 National Apartment Report).After reaching a peak of 69 percent in late 2004, the homeownership rate has declined since 2005 to less than 68 percent, resulting in an additional 2.6 million renter households  (Source: Marcus & Millichap, 2009 National Apartment Report).Outlook Brighter in 2010 and BeyondThe National Association of Home Builders expects multifamily housing to rebound in 2010. This year, many investors are bracing for a tough spell and working to emerge at the end positioned to benefit from the inevitable recovery. Mark Obrinsky, the chief economist for the National Multi Housing Council, said in January 2009 that although apartment demand was in the down phase of the cycle, “The long-term prospects for the apartment sector are strong. The number of people between 20-34 years of age is rising rapidly, and as they enter the rental market, demand will rise correspondingly.”