SPECIAL REPORT: In Time of Economic Turmoil, Panel at MHW Finds Some Silver Lining in Multifamily Sector

By Anuradha Kher, Online News EditorDenver–While there is plenty of bad news in the markets currently, panelists at the opening session of the 2008 Multi-Housing World Conference in Denver managed to find some good news to share with attendees. When Richard Green, Ph. D, professor and chair, University of Southern California Lusk Center for Real Estate, began his presentation this morning he confessed, “I find it hard to be optimistic at this time.”He painted a picture of the state of the economy and the way it relates to the multifamily sector. And though most of it was grim; spreads rising and investor confidence becoming a real problem, he pointed to the silver lining on the horizon. “The good news is that treasury rates are falling,” said Green.Sam Chandan (pictured first from top), Ph. D, chief economist and senior vice president of Reis started off by saying that there is major uncertainty in the real estate market due to the disappearance of major financial institutions and the conservatorship of Fannie Mae and Freddie Mac but that the popular press does not describe accurately the state of commercial real estate in general and multifamily in specific. “So there is disconnect for people in our industry between what is happening in the overall residential market and the multifamily market,” Chandan said. That is not to say that the tightening in the credit market is not affecting the apartment sector, he explained. The good news, according to Chandan, is that the overwhelming bias to buy has now shifted in favor of renting. “The transaction activity in the apartment sector has remained fairly stable due to GSE financing, with the biggest price inclines coming from this sector as well,” he said. The apartment sector is better positioned to deal with sudden changes in policy that might affect the availability of capital, explained Chandan.However, he concluded by saying that the political and policy environment remains uncertain and when in another 18 months a large number of loans will require refinancing, if the GSEs tighten their credit lines, there will be a problem.Vice President of research at M|PF YieldStar, Greg Willet (pictured second from top), began on a light note, saying that he did not change his power point presentation following the turmoil in the markets in the last few days. This is because his message for a while now has remained the same, “This makes no sense at all!” Many in the multifamily industry have counted on growing rental demand due to demographics and the changing economic landscape for the industry’s stability in recent times of upheaval. But Willet cautioned against equating rental demand with apartment demand. “There is a shadow rental market out there. In fact, rental single-family vacancy has gone down in recent years,” he said.Bob Bach, senior vice president and chief economist, Grub & Ellis Inc., described what is happening in the economy in two pithy statements. “There is an escalation of panic and there is deleveraging. The sooner we hit the bottom, the sooner we can start to go up. I believe we will hit the bottom in the first half of 2009.”Green however disagreed, saying he was reluctant to predict that national prices will hit the bottom all at once. “I think it will vary greatly by region. Florida is going to take a very long time to hit the bottom and coastal California, for example, is almost already there,” he explained.Bach ended by saying that the capital markets will settle down and when they do, they will move forward in a very conservative way with much more regulation.What multifamily professionals need to watch out for:Look for some strengthening of for-sale demand in 2009, which will push up loss of renters to the for-sale market.Ongoing construction is more aggressive than most people realize.Starts are going to slow down quickly.Apartment occupancy has come down to a loss of 1 to 1.5 percent this year. There has been significant slowdown in rent growth in the last two quarters and there will be further softening because many people are scrambling due to changes in what they want from the place they live in.