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Spotlight: Multifamily Housing |
State of the District |
National Banking Trends
Up, Up, and Away: Multifamily Rents, Occupancies Rising
In general, markets located within the Sixth District continue to rebound (see table 1). The two exceptions are Birmingham and Jacksonville: both of these markets experienced modest softening in their occupancy rates. Miami and Nashville had the highest occupancy rates of the eight markets tracked in the Sixth District. Orlando, which experienced significant lows in 2010, showed the most significant rebound in 2011.
The nationwide occupancy rate is composed of the Class A, B, and C properties. Units typically categorized into Class A properties are generally larger, upscale, and owned by large institutions. Class B Properties are nice, but a step below Class A in several regards. Class C properties are generally smaller, older and owned by local community entrepreneurs. Historically, Class C properties have seen smaller rent increases and occupancies have lagged the Class A and B properties. Chart 2 shows the trend of occupancy rising in Class C properties at a faster clip than Classes A and B. This trend is driven by a number of factors, the most notable being the heightened rents for Class A and B properties and the lower price points for Class C rents. This trend should have positive implications for community banks as values increase on Class C properties that compose commercial real estate loans made by community banks.
Multifamily new construction: Can It Be Sustained?
Chart 3 showcases new unit deliveries (new construction) and absorption. It uses a four-quarter moving sum to reduce the seasonal volatility of demand. The chart shows that the rate of absorption (demand) has fluctuated greatly over the last 11 years, from a low of 250,000 units to a high of 650,000 units leased nationwide. Over this 11-year period, the average level is roughly 283,000 units. In contrast, new deliveries (new construction) remained relatively steady prior to the downturn, at just over 300,000 units annually. Over the 11-year period, the average level of absorption is roughly 234,000 units per year. The difference between the two long-term average figures includes units that are retired, or that have been converted to condominiums. Currently, new units are being delivered to the marketplace at an approximate rate of 112,000 per year. Present demand for multifamily units is 186,000 units per year.
Based on a level of national economic activity of around 125,000 jobs created per month, it appears that deliveries' present level of 112,000 units annually is sustainable and can be absorbed without difficulty. However, based on the number of units that are permitted, under construction, and in various stages of planning, the level of future deliveries appears headed higher. Only time will tell whether the market can handle a higher rate of newly constructed units. For this level of absorption to occur, however, the market will have to overcome several hurdles, including higher multifamily rents, increases in home affordability, and more young adults living with prior generations.
CMBS: Is the market improving?
Year to date for 2012, the CMBS conduit market has issued approximately $9 billion of new securities backed by commercial real estate (CRE) properties, excluding multifamily (see the table). The market started slow, with only one deal completed within the first two months of this year. However, the market showed a notable uptick as five issuances were brought to market in April. Additionally, the transactions that were completed in May and slated to settle in June represented the largest pools of securities for the year.
This article was written by Brian Bailey, a senior policy analyst in the Atlanta Fed's supervision and regulation division.