Friday, October 31, 2008

Multifamily Fundamentals in Question

Multifamily is the sector of commercial real estate most directly tied to the broader housing market that has been at the root of America's financial market slump. While the different subgroups of multifamily are being affected differently by today's market, it's generally safe to say that funding multifamily development and acquisition has gotten more difficult, and the trends that had been expected to drive up rents and occupancies have so far failed to show up in many markets. However, compared to other commercial real estate sectors, multifamily has held its own with major owners such as Camden Property Trust and AIMCO reporting flat or slightly positive 3Q08 results.

According to the National Multi Housing Council's latest survey, multifamily industry insiders feel the market is at historic lows in terms of investment volume and availability of capital. With unemployment rising and the national economy in general decline expect fundamentals like occupancy and rents to start declining as well, especially in areas hit hard by job losses. Hopefully some of the 'vulture capital' waiting on the sidelines will soon become active and start transactions flowing again, but for now with buyers and sellers at a stand-still, it's important to remember that medium and long-term trends still bode well for multifamily rental properties.

In the medium term, continued turmoil in the for-sale housing market, projected to last from 6 to 24 more months, will keep renters renting and return some former homeowners to the rental market due to foreclosure. This should keep occupancies relatively healthy although these are not the type of renters who can support big rent growth. Additionally, lenders should return to multifamily before they look at other sectors because of government backing through Fannie & Freddie and the commodity nature of rental housing - consumers will stop shopping, dining out, and traveling before they stop renting a place to live.

In the long term, demand for rental housing should be very strong thanks to general demographic trends toward a younger, more mobile, more urban population. Arthur C. Nelson from the University of Utah predicts that between now and 2020, 72% of new housing stock should be built as rental units in order to maintain relative supply-demand balance. Hopefully we can keep these long term trends in mind as we wait for the good deals to make their way to market.

Llenrock Group

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