Multifamily’s New Trajectory

Despite growing rents and occupancies, there is still room for improvement in the multifamily sector.

Despite growing rents and occupancies, there is still room for improvement in the multifamily sector, Mark Obrinsky observed during the panel discussion “Multifamily Boom: When Will This Hot Segment Sputter?” at the National Association of Real Estate Editors real estate news conference in Denver. The chief economist for the National Multi Housing Council noted that although rents have risen in the 4.5 to 5 percent range, real rates (after expenses) are actually up 1.5 to 2 percent. While still good, the national average at the last peak, in the third quarter of 2011, was 6 percent lower than the level in 2006. “By some measures, there’s still some recovery to come,” he noted.

And with vacancy rates significantly improved over the past couple of years, landlords can work to make that rent recovery happen. The national average vacancy rate in the first quarter was 5.1 percent, Obrinsky noted, a far cry from the 15 percent levels in 2009 and more in line with the 4 to 5 percent range of 2006 and 2007. “Landlords have pricing power,” declared Adam Fruitbine, managing director for Alliance Residential Co. Both rents and vacancies vary by market, but all the markets have come through the downturn and snapped back very quickly, he maintained. At the same time, don’t underestimate the economy, warned AIMCO CEO Terry Considine. “How the capital markets play out is the biggest threat to multi-family.”

As with single-family housing, multifamily faces a shortage of supply relative to demand—making overbuilding not even a word worth bringing up, according to Obrinsky. For about 10 years, starts remained level at about 300,000 per year, a figure that dropped to 100,000 after the downturn and has only recovered to about 200,000 today. That is at least 100,000 behind meeting demand, and more likely 150,000, he said.

But panelists debated just how much of a trajectory demand will maintain in the long term. Considine sees a strong, predictable demographic impact from the generation following the Baby Boomers, and declared, “The Baby Boomer bust is a bust.” And while Obrinsky sees a shift in preference among the newest generation to enter the apartment market—a group that is getting accustomed to using rather than owning (think Zipcars and streaming video), not to mention a desire for greater mobility and a reluctance to add a mortgage to the student debt they are already shouldering—Considine believes such preferences are short term and that like their parents the Gen Yers will eventually also want to own.

Fruitbine, for his part, is answering the strong desire of the Gen Yers to depart their parents’ homes by building smaller, more affordable units.

For more NAREE coverage, read “NAREE Special Report: Housing Demand Grows; Will Supply Follow?”