Hollywood – May 15, 2014

As the national economy improves, and as corporations continue to post profits and add jobs, the multifamily market likewise has been experiencing an upswing. Key demographic groups and investor demand are also playing a role in the market’s strength this year.Impact of employment and demographics“The 25- to 34-year-old age cohort is a key driver of demand for rental housing. Assuming employment conditions return to previous norms, this could add 1.6 million new workers from this cohort,” according to Freddie Mac’s most recent multifamily forecast report.That demographic plays a key role in multifamily performance, because younger workers are more likely to seek out apartment rentals and individuals in this group follow the jobs. With more than 2.2 million jobs added in 2013 and the national unemployment rate down to 6.7 percent and dropping, employment has supported a surge in multifamily performance.At the other end of the spectrum, many older adults choose to downsize from single-family homes in favor of lower-maintenance properties like apartments. Baby boomers, by virtue of their great numbers, are helping to create a larger-than-normal shift away from single-family living.

“The positive impact the baby boomers are having on multifamily construction can already be seen this year as the shift in demand from single-family homes to multifamily units picks up and is expected to remain strong for the next few years, according to Senior Federal Economist Jordan Rappaport,” reported Apartment Intelligence in February 2014.

Census Bureau numbers confirm the shift, showing that households opting for the rentals over home ownership increased by 359,000 people in the third quarter of 2013.

Property values

Freddie Mac reports that, nationally, “multifamily values have fully recovered from the Great Recession,” outpacing other commercial real estate sectors (although the office, retail and hotel sectors have also posted property value gains in recent years).

Gains in the multifamily space can be attributed to strong fundamentals, low interest rates and lower risk premiums. A quick note about interest rates: while they have increased some in the past year, current rates are still relatively low. Freddie Mac projects a 2014 year-end, 10-year Treasury rate of 3.2 percent.

New development and vacancy rates

Demand for multifamily housing contributed to development of 292,000 new units in 2013, which was a 20 percent increase over the previous year (80 percent over 2011).

The National Association of Homebuilders also reported strong numbers in terms of starts in multifamily construction in 2013.

“The multifamily market has rebounded significantly from its trough in 2009 at 82,000 multifamily housing starts to 340,000 in 2013,” said NAHB Chief Economist David Crowe. “NAHB is forecasting 363,000 multifamily housing starts in 2015, which is above the previous longer-term average of 340,000 as more young adults prefer renting.”

Fannie Mae reports that “vacancy levels [have remained] steady, despite new additions to existing supply coming online late in the year.”

REIS reported a 20-base-point decline in apartment vacancy rates in the first quarter of 2014, which brought the rate down to 4 percent nationally. CalculateRisk, an economics website, writes that “demand for apartment is seemingly insatiable.”

Availability of capital

Experts expect availability of capital to increase for the multifamily market in 2014, further boosting the success of the sector.

Multi-Housing News reported that “lenders will become even more eager to make loans in the multifamily space…because of greater confidence in the economy and markets,” accordingd to Greystone COO Bob Barolak.

Barolak also expects an increase in multifamily capital after a return of commercial mortgage-backed security (CMBS) lenders to the space after a hiatus in the market in 2012. These lenders had largely disappeared from the market due to an inability to compete on interest rates but, in 2014, their rates are ringing in at 10 to 15 basis points lower than Freddie Mac.

Investment summary

A 2014 ULI investment survey shows an increased “buy” recommendation from investors for moderate income multifamily properties. (37.6 percent of respondents recommended a buy position and 34.3 percent recommended a hold position on these types of properties).

Investors at the “View from Investors Panel,” moderated by Avanath Capital Management CEO Daryl Carter expressed a variety of approaches to the market, but agreed that the “U.S. is still viewed as one of the most stable markets in the world“, as reported by GlobeSt.com.

“Multifamily in a core, diversified fund preserves cash,” said Terri Herubin of Cornerstone Real Estate Advisers. “It’s an important source of income, but the way we can ensure cash flow is to buy where we can raise rents—be it because of job growth or buying undermanaged assets.”

That panel prompted one writer to pen the blog, “Multifamily Dubbed ‘The Most Interesting Investment Market in the World’” earlier this year.

We hope you enjoyed this newsletter and wish you a great rest of your week!

PointOne Holdings