ViewPoint: Multifamily Housing

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Spotlight: Multifamily Housing

Up, Up, and Away: Multifamily Rents, Occupancies Rising
Much has been made about the recent improvement in multifamily market conditions. The multifamily sector has seen a significant rebound in fundamentals, such as demand and supply and increased investor interest, within the last two years. Increased demand has translated into occupancies that have risen significantly since the lows of 2009–10. According to Axiometrics, nationwide occupancies for multifamily housing had fallen to 91.8 percent in 2009 (see chart 1). These lows for multifamily product had not been seen since 1996, when data were first recorded. Since reaching those depressed levels, occupancies have rebounded significantly to 93.7 percent. Contributing significantly to the rebound is the fact that minimal new construction has been brought to market in the past few years. Multifamily occupancies should rise further as the peak leasing season picks up this summer. Industry forecasts have occupancy rising to approximately 95 percent in 2012. Correspondingly, rents are forecast to grow swiftly, at an approximate rate of 5 percent during 2012.

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?
Roughly 650,000 multifamily units across the United States are in various planning stages. In addition, around 135,000 multifamily units nationwide are currently under construction, and an additional 50,000 units where the permits have been approved and construction can commence immediately. As a result of the increased demand and minimal new supply of multifamily units, there have been questions in the industry regarding the scale of the resurgence in multifamily new construction.

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?
During the last ten quarters, volume in the commercial mortgage backed securities (CMBS) market has fluctuated significantly. Quarterly CMBS volumes ranged from a low of zero to a high of almost $8.5 billion. The market restarted in 2010, only to encounter significant hurdles that led to very poor issuance volume. At the beginning of 2011, industry experts had concerns about the minimal volumes of the prior year's CMBS market volume, making predictions about the anticipated market size of $40–$50 billion for the coming year. According to Bloomberg, the CMBS conduit market accounted for roughly $27 billion in 2011. At the beginning of 2012, industry experts again made predictions as to the size of the CMBS market. These predictions ranged from $30–$50 billion.

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.

Brian Bailey This article was written by Brian Bailey, a senior policy analyst in the Atlanta Fed's supervision and regulation division.