Rental Apartments a Bright Spot in a Dim Housing Market
Against ongoing uncertainty about deepening problems with subprime mortgages and what speculators who jumped into the housing market too late for a quick profit will decide to do, multifamily developers and analysts at the NAHB Pillars of the Industry multifamily conference in Hollywood, Fla. earlier this month agreed that condominiums in some of the formerly most overheated markets will be “in the doldrums” well into 2008.
“We’re in for a fairly ugly correction,” said Ron Terwilliger, president of Atlanta-based multifamily developer Trammel Crow Residential. “It’s not that condominiums are just bad,” he said, “for-sale housing is bad.”
“Am I allowed to use negative numbers?” quipped Ara Hovnanian, president and CEO of New Jersey-based Hovnanian Enterprises, when asked to rate the housing market on a scale of one to 10.
As subprime and high-risk mortgage market lenders tighten their requirements, the condominium market will contract because fewer people will qualify and the specter of foreclosures, at least in the near term, will loom, said Ronald Ratner, president of the multifamily development, management and investment firm, Forest City Residential Group, based in Cleveland.
In most markets, foreclosures will register only as “a blip,” said Ratner. But he added that the psychological effects from the subprime fallout could run much deeper, giving many prospective home buyers second thoughts.
Compounding the pessimistic short-term outlook is the record number of vacant year-round single-family and multifamily housing units on the market. According to Dave Seiders, NAHB’s chief economist, 5.5 million homes, or 4.5% of the supply, were vacant at the start of this year, largely because of speculators.
The burning question for the industry, he said, is what those who have deposits on those vacant units or who already own them do next. Among the options are deciding not to close on the purchase, selling the property at a loss or renting it until the market turns around. And what effect will the disposition of those units have on the market and the industry?
Seiders predicted a decline in overall housing market starts of 20% in 2007 from 2006. Single-family housing will drop 22%, condominiums will be down 22% and overall multifamily will be down 14%, he said.
Glimmer in the Rental Market and Housing Fundamentals
While near-term prospects for multifamily condos are sobering, multifamily rentals are expected to be relatively bright, with housing market fundamentals remaining strong and providing glimmer for the long-term outlook.
Mortgage rates remain affordable and underlying housing demand, which will reassert itself after the current correction ends, is running at an annual average of 1.8 million new units a year, Seiders said. He added that more excess inventory needs to be burnt off and that the national economy, while avoiding recession, will remain on the “soft side” most of the year and the job market slowdown now underway will continue into 2008.
Ron Witten, president of Witten Advisors, a Dallas-based advisory firm specializing in the apartment market, said that rentals will face some short-term challenges as the speculative aspects of the marketplace sort themselves out.
“One in 10 single-family rental houses are empty,” Witten said. “One of nine condos are empty today, 11%. We won’t see much burn-off in excess condominiums in 2007 or 2008, though particular markets differ.” Witten blamed part of the excess in condos — with about 100,000 remaining to be sold — on the wave of condo conversions during the boom years.
On the supply side, Witten said multifamily starts and permits will edge lower during the year and “deliveries will ease in 2007.”
But he predicted that rental occupancy rates will strengthen and hover in the 2.5% range, compared to 4% at the peak of the home buying boom. Of the major metro markets, he said that eight will experience high rent growth in the coming year, 28 will show “normal” growth and six will be sub-par.
“I’m a bull long-term on multifamily housing demographics,” said Leonard Wood, managing director of Charlotte, N.C.-based Wood Partners. He noted that the market is seeing a growing number of smaller families suited to apartment living, which bodes well for the industry, and on the financial side, the cost of the land available for housing is on the downswing.
Tom Senkbeil, executive vice president and CIO of Post Properties, an upscale multifamily developer based in Atlanta, said his company focuses on urban infill communities and targets young professionals who want to live and work in cities. His mix, he said, is currently more toward apartments than condominiums.
“We do a substantial number of renovation projects,” Senkbeil added. “They have much higher returns.”