Credit Crisis Threatens to Put Rental Housing in Short Supply
The current turmoil in the capital markets is jeopardizing the production of quality rental housing across the country, including the development of sorely needed affordable apartments financed with Low Income Housing Tax Credits (LIHTs), according to multifamily apartment owners and developers who spoke last month at the International Builders’ Show in Las Vegas.
“Everybody in the housing industry was hoping that multifamily would continue to be the bright spot, but that’s not happening,” said Steve Lawson, president of The Lawson Companies, Virginia Beach, Va. “The credit markets have turned upside down on us.” Underwriting standards have become “extremely difficult,” he said, and it now takes two to three times the amount of equity to do a project because “lenders aren’t willing to take on additional risk.”
Market-rate rental communities coming through the pipeline have slowed to a trickle, and that poses sobering implications for meeting the housing needs of the growing number of younger households in coming years who will just be entering the housing market and will disproportionately rely upon rental housing until they become more established in their jobs and careers.
“Multifamily projects take longer to design and build than single-family homes, so it’s important to have a development pipeline,” said Lawson. “In the next few years, the huge Generation Y age cohort — people now in their early 20s — will begin entering the housing market, and they won’t be able to find apartments. We won’t be able to just turn the spigot on to meet their demand.”
From start to finish, multifamily buildings can take two to three years to produce, or even longer, Lawson said.
The situation with affordable apartments is just as bad, if not worse, according to Robert Greer, president of Michaels Development Co. in Marlton, N.J.
“Despite a demand for our product that far exceeds the supply, affordable apartment developers are finding it nearly impossible to assemble the necessary capital to move forward with their projects,” said Greer, whose company has built more than 40,000 LIHTC units over the past 30 years.
“Putting together deals that make sense is more difficult now than it has ever been – primarily because the program’s biggest investors of the past — Freddie Mac, Fannie Mae and large banks — have been sidelined.”
The investors who previously bought the credits “are not making profits so they’re not seeking credits to offset profits,” he said.
Greer said he now has to sell the credits directly to banks, and where it used to take one or two financing sources, it now takes five or six, or more, including heavier reliance on state agencies and city government.
“The LIHTC program works,” said Lawson. “But the credit crisis has reduced potential buyers of the credits by about two-thirds. We have lots of supply and no demand, so prices are plummeting.”
Bernard Markstein, NAHB’s staff vice president of forecasting and analysis, said that if frozen credit markets don’t start to thaw, or job losses continue to accelerate, NAHB could ratchet down its forecast for multifamily starts even further than it already has. “Right now, we are forecasting 188,000 multifamily starts in 2009,” he said, down more than 100,000 units from 2008.
The multifamily market, already under pressure from the excessive inventory of unsold single-family homes and condos on the market, is now also feeling the impact of today’s deepening recession.
The sharp decline in multifamily production is worrisome, according to Markstein, because annual starts have hovered between 250,000 and 350,000 units for more than a decade.
“The stability in the starts over such an extended time indicates that it is a sustainable level of development,” said Markstein. “You can argue that the product mix between condos and rentals got skewed during the housing boom, but you can’t say that there was overbuilding in the multifamily sector. Given long-term population and job growth, the need for future rental and condo units would support a return to previous production levels.”
For more information, e-mail Ann Marie Moriarty at NAHB, or call her at 800-368-5242 x8350.