July 25, 2011
Nation's Building News

The Official Online Newspaper of NAHB

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Multifamily Housing
Rental Apartment Starts Push Into Positive Territory, With a Lot of Catching Up to Do

Housing experts at last month’s PCBC in San Francisco agreed that rental apartments are showing significantly more strength today than the single-family sector, but they too face a fairly long, slow road back to peak conditions.

“It will take a few more shovels in the ground,” said NAHB Senior Vice President Sharon Dworkin Bell, before multifamily production hits its full stride, which panelists said should be in the range of 300,000 units annually. The industry climbed well into that range for several years before the housing bust.

In the meantime, she predicted, “there’s going to be a supply/demand imbalance.”

NAHB is forecasting 136,000 multifamily starts this year, followed by 146,000 in 2012, still well below what’s needed, Dworkin Bell said.

“Most rental markets are seeing improvement,” said Mark Obrinsky, vice president, the National Multi Housing Council, with vacancies falling below 6%, putting them in the “normal range.”

This year’s second quarter “was another strong quarter,” he said, with early data showing rents up 1.6% on average from the previous quarter and absorptions running strong.

The challenge ahead is making a comeback on the supply side from “a complete crash” that pushed multifamily production to the lows of the 1960s.

“Starts are now off the trough, but nowhere near the late 1990s through most of the last decade,” Obrinsky said.

A steady decline in homeownership — from a rate of more than 69% at its peak to above 66% now, and heading possibly to 65% or even lower — is feeding into demand for rental properties, with every one percentage point drop the equivalent of 1.1-1.2 million additional renters, “a big factor in apartment demand for the last year and a half,” he said.

The financing “bottleneck” of the past two years appears to be easing, he added, especially on the equity side, with debt financing still less readily available than it used to be.

Speakers looking at the financing situation were positive about opportunities for developing prime rental properties, and even suggested that some investors may have already become overly enthusiastic about the rents and profits they expect new buildings to generate.

“As a lender, it’s nice having money again,” said Marshall De Wolfe, director of loan production for Intervest, whose company has recently initiated lending in Seattle, the San Francisco Bay Area, Los Angeles and Orange County, Calif.

De Wolfe reported that competition in multifamily lending is beginning to heat up, with delinquencies at their bottom, although bank auditors are still coming in and overreacting, “blindsided by someone’s hot button.”

He also voiced concern about proposed regulations for Qualified Commercial Real Estate (QCRE), which like the plan for residential mortgages, would lower the debt coverage ratio for conforming loans. “This would handcuff us,” he said.

If the original QCRE does make it through the review process in its current form, loans for multifamily development could become less affordable and available, Dworkin Bell said.

Marshall noted that slow job and wage growth are also continuing to constrain demand for rental housing. Looking at today’s more than 9% unemployment rate and predictions that new jobs will materialize at an average monthly rate of 200,000 for the next few years, “we will have to see it [unemployment] go down quite a bit.”

Fannie Mae Vice President Paul Lewis said that “multifamily housing has fared well through a difficult recession,” thanks in large part to the stabilizing influence of the secondary market.

Last year, Lewis said, the government sponsored enterprises provided $32 billion in multifamily financing. “Multifamily capital is continuing to flow in the market, keeping it active,” with the GSEs providing $8 billion in this year’s first quarter.

“Strong economic fundamentals in multifamily are attracting equity capital through ownerships or securities,” he said, adding that business has been busy and there have even been some signs of overheating on the principal side.

Considering the importance of mortgage backed securities to the functioning of the multifamily market, panelists were fairly optimistic that entities like Fannie Mae and Freddie Mac will continue to be around in some form.

“Congress knows it has to do something with the housing finance system,” said Dworkin Bell, but “it doesn’t want to make a mistake,” so it could end up holding off making decisions until after next year’s elections, “in the meantime making the markets nervous” and creating a “messy” situation for the next couple of years.

Efforts to cut government spending represent a more immediate threat to multifamily housing. The Department of Housing and Urban Development “is not a favored child” in the eyes of some in Congress, she said, and budget cuts could be proposed for important housing programs.

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