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High Home Sale Prices Lift Demand for Rentals
The rental side of the multifamily industry is looking healthier, according to industry analyst Ron Witten, of Witten Advisors. “We’ve had five quarters of year-to-year gains in rents,” he told members of the NAHB Multifamily Leadership Board in a semi-annual conference call late last month.
“The recovery in our industry is driven almost exclusively by demand,” said Witten, which is partly the result of a premium for home buying over renting that is currently running much higher than usual and pricing households out of the for-sale market.
“Historically,” said Witten, “a house payment on a median-priced house is about 40% higher than the median rent. But now, it’s slightly more than 50%. That’s a level we haven’t seen since the '80s during the time of double-digit inflation.”
Bolstered by units intended for sale, multifamily permits also are at levels not seen since the 1980s, and starts are at post-'80s highs.
There were 132,000 starts of 2+ multifamily housing units intended for sale in the first quarter of this year, representing about a third of all multifamily production, about the same share as in the condo boom of the 1980s. The actual number of multifamily units built in 1985, however, was about twice what it is today.
Witten pointed out that the inventory of condo units is still in balance, with a condo vacancy rate hovering around the 10-year average of 5.1%. There is no oversupply problem with condos nationwide, although there are variations among individual markets.
Witten said that he expects to see the demand for rental units rising faster than the new supply through 2006, a trend that should gradually lift occupancy levels and rents back to historic norms.
Looking at multifamily sales and acquisitions, Witten noted that this year’s closings on apartments selling for more than $5 million amounted to $25.7 billion through May — a 59% increase over the first five months of 2004. Condo converters paid $8 billion, nearly a third of the dollar volume, to purchase 16%-17% of the units sold during the first five months of this year.
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