Freddie Mac Says Multifamily Firing on All Cylinders

In its most recent U.S. Economic and Housing Market Outlook, Freddie Mac affirms the strength of the multifamily market.

Washington, D.C.—In its most recent U.S. Economic and Housing Market Outlook, which was released this week, Freddie Mac affirms the strength of the multifamily market. It’s still a case of strong fundamentals plus basic economics: demand for apartments has been rising without a matching amount of supply, though the report does note that multifamily starts are rising as lenders become more willing to lend.

The report stresses that while for-sale housing remain weak, “households have turned to rental to meet their shelter needs.” Citing Census Bureau numbers, Freddie Mac says that during the 12 months ending during the second quarter of 2011, a net of 800,000 new households have formed nationwide, which represents a net reduction of 600,000 homeowners and a net increase of 1.4 million households that have moved into rental housing, or a 4 percent rise in the number of tenant households in just one year.

Some of the demand is from households who can no longer afford homeownership, but not all of it. In fact, much of the demand for rental housing is from young and newly formed households who have decided to postpone homeownership during these unsettled economic times. The decline in the homeownership rate has been sharpest for those household heads under 30 years of age. While the homeownership rate has fallen about 1.5 percent over the past year (from 66.9 percent to 65.9 percent during the second quarter of  2011), owner rates have fallen by 4.4 percent (to 21.9 percent) for those under 25 years of age and by 7 percent (to 34.7 percent) for those aged 25 to 29 years.

The sudden upsurge in demand has pushing occupancies higher. Freddie Mac, citing a Reis Inc. survey of  professionally managed buildings in metropolitan markets, says vacancy rates stood at 5.9 percent during 2Q11, the lowest rate since 2007 for that class of apartment  buildings. Vacancies have dropped in buildings of fewer than five units as well.

Apartment development has been held back since the onset of the recession by the all-around tightness of real estate lending. “Indeed, completions of buildings with at least 20 apartments had shrunk in the second quarter of 2011 to the lowest level since early 1995,” says the Freddie Mac report. “With rental demand up and new supply limited, apartment market conditions have tightened in most metropolitan markets. The National Multi Housing Council’s Market Tightness Index recorded an all-time peak in April of this year, a record for the 12-year history of the Index.”

However, lenders are coming around to the idea that financing more apartments is a good investment. This year’s origination volume is so far stronger than during 2010, partly because of mortgage rates, but also because of improving apartment-sector fundamentals that have attracted banks back into the market. Likewise, some traditional portfolio lenders have strongly re-entered the market. “The American Council of Life Insurers stated in its mortgage commitments report [that] there were 165 apartment loan commitments in the second quarter alone, the largest number of multifamily loan commitments by insurers in 39 years,” Freddie Mac explains.

Yet supply is nowhere near to catching up with demand, and that has naturally meant higher rents, though much of the rise so far has been recovering the drop in rents that occurred in 2008 and 2009. The Bureau of Labor Statistics’ CPI-rent metric (rent paid on a primary residence) was up 1.4 percent over the 12 months through the second quarter 2011, while Reis’ survey reported a 2.4 percent gain for effective rents in professionally managed apartments over the same period, the report says.