Fannie Mae Mostly Optimistic about Multifamily in 2011

Despite stubbornly high unemployment, multifamily fundamentals improved during the third quarter of 2010, but the sector's recovery is expected to pull back slightly during the fourth quarter.

The ongoing rush of recent reports, surveys and other data generally shows the strength of the apartment market as 2010 comes to a close, but the road ahead might still have a bump or two, according to the latest Fannie Mae Multifamily Market Commentary. Despite stubbornly high unemployment, multifamily fundamentals improved during the third quarter of 2010, but the sector’s recovery is expected to pull back slightly during the fourth quarter.

That isn’t to say the year won’t end on a positive note. The commentary, written by Kim Betancourt, director of the GSE’s Multifamily Economics and Market Research, predicts that national apartment rental growth will finish out 2010 in the range of 3 percent to 4 percent for the year and then rise by 1 percent to 2 percent in 2011. Moreover, national vacancy rates should fall to about 7 percent this year and then remain steady over the short-term.

“The only concern is that multifamily fundamentals may slide if job growth stalls,” Betancourt writes. “On the other hand, if job growth should start to pick up substantially, rent growth could climb higher than projected.”

Preliminary apartment market data for Q310 suggest that the vacancy rate for institutional investment-type properties likely fell for the third quarter in a row, declining to 7.25 percent from 7.5 percent in Q210, Betancourt adds. Asking rents also appear to have risen during the third quarter, perhaps by as much as 0.5 percent quarter-over-quarter, with rent growth now up by an estimated 1.5 percent for the first nine months of 2010.

Some of that activity is a function of the seasons. Second and third quarters tend to be the most active time of the year for landlords signing on new tenants, and that seems to have been the case this past spring and summer.

But the uptick in demand has been more than a matter of the calendar. According to the commentary, other reasons for increased multifamily rental demand include a higher rate of tenant retention; declines in new apartment construction projects coming on line; some former homeowners turning to renting; and job growth. Although U.S. job growth has not been as strong as everyone wants, there has been job growth: Through August, the private sector has added 763,000 jobs in 2010.

Landlord concessions, which have been high since the beginning of the recession, have started to come down, a trend that ought to continue in 2011. “Indeed, many tenants appear to be moving up to higher quality apartments that are now more affordable, thanks to rental concessions,” notes Betancourt. “While still fairly elevated, the current concession rate [about a half month on 12 months’ rent] is a significant improvement from January’s rate. In addition, with credit remaining tight and housing prices stalled, many households appear to have decided that renting is the preferred option to purchasing a home, at least for now.”