By Victor Calanog
VICE PRESIDENT OF RESEARCH AND ECONOMICS, REIS INC.
Strong multifamily Sector may be leveling off
In this past November’s column ( sctsm.in/4821), we speculated on whether the high-flying
multifamily sector was experiencing a slowdown given heightened fears for the economy and
job growth. Results from this past third quarter suggest that the sector continues to perform
well, but that it is not immune from anemic economic fundamentals.
Vacancies fell by 30 basis points to 5. 6 percent in the third quarter, cratering to a level close
to the 5. 5 percent cyclical low that the sector hit in late 2006 before the housing bust sank the
overall economy. Asking and effective rents increased by 0.6 and 0.7 percent, respectively,
which is about the same pace seen in second quarter ’ 11. Of all sectors in commercial real
estate, multifamily has shown the most consistent performance in terms of improvements in
occupancies and rents, despite slow economic growth and job creation.
On the other hand, national rent growth has fallen short of the rosiest projections. At the
start of 2011, effective rent growth forecasts were as high as 6. 5 percent. Reis was projecting a more conservative 4. 3 percent, but had to
scale back expectations to
a mere 2.6 percent, given
that rents had only grown
by 1.8 percent by the third
quarter. Some acceleration in rent growth may
have happened in the
fourth quarter if national
vacancies dipped below
5. 5 percent, but that likely
will be tempered by seasonal weakness in leasing in the colder months.
Some submarkets have
shown impressive rent
growth at more than 6 percent, but others have pulled back, with rents declining by nearly
Source: Reis Inc.
APARTMENT VACANCy AND RENT GRO W TH
What appears to be happening is that higher-quality Class-A apartment properties can push
rent growth further, partly because they experienced larger declines in 2009 and now have
more ground to make up. Class B/C apartments, on the other hand, didn’t experience much of
a decline in 2009, and primarily cater to a tenant base with compensation levels that are not
increasing much. They are bumping against income constraints sooner than Class-A buildings,
pulling down overall performance.
Large apartment real estate investment trusts are reflecting this divergence in performance.
Equity Residential still expects healthy income growth through this year, while AIMCO’s quarterly call this past October sent its stock price plunging when it hinted at a slowdown in leasing traffic. AIMCO holds a larger proportion of Class B/C properties versus Equity Residential’s
primarily Class-A portfolio, and its tenants are feeling the squeeze.
This is not to say that the multifamily sector won’t have a great year. With the housing market still on the ropes and construction relatively modest, demand for apartments will remain
strong. Rent growth may even accelerate as vacancies fall below 5 percent. But expectations
of soaring rent growth must be moderated by basic economic rules: If economic growth and
job creation aren’t broad-based or robust, not all apartment buildings will reap outsized benefits. Furthermore, risks to domestic economic recovery still remain, the most prominent of
which revolves around political gridlock in domestic budgets and the European debt crisis.
The apartment sector is poised to perform relatively well this year, but forecasts will be revised significantly if the global economy is engulfed in a second credit-crisis-driven recession.
Victor Calanog, vice president of research and economics at Reis Inc. ( www.reisreports.com), writes a monthly column
on property types for Scotsman Guide. He and his team of economists are responsible for data models, forecasting,
valuation and portfolio services for clients in commercial real estate. Reach him at email@example.com.
michael Steinberg, analyst for Reis’s economics department, contributed to this article.
E.J. Burke VICE CHAIRMAN MORTGAGE BANKERS ASSOCIATION
BY RANIA OTEIF Y
Commercial mortgage-backed securities (CMBS) and
the multifamily market have been hot topics in commercial real estate these past few years. We asked
E.J. Burke, vice chairman at the Mortgage Bankers
Association (MBA), to share his thoughts on where
the market is headed. As MBA prepares for its Commercial Real Estate Finance/Multifamily Housing
Convention & Expo to be held early this month, Burke
discusses his outlook for the industry and the factors
that can reshape the business environment.
What is your outlook for this year?
In 2011, we saw steady improvement in property fundamentals across the board and especially in multifamily. These property fundamentals will continue
to improve through 2012, but we probably won’t
see as strong an improvement in the multifamily
world. With those property fundamentals improving, the fair amount of liquidity that we have seen in
the marketplace for mortgage finance will continue.
[Recently,] I am actually a little bit more optimistic
about the capacity of CMBS to improve and provide
some level of financing to the market.
What are the areas of concern?
[They] would be around the impact of Europe and
the external problems that we see in the world. The
other thing that concerns me is what comes out of
Washington, D.C., in particular the future of the gov-ernment-sponsored enterprises and the rulemaking
coming out of Dodd-Frank. The Dodd-Frank rulemaking around risk retention will have a significant impact
on CMBS. In particular, the premium cash capture reserve account concept that regulators floated in their
original proposal would probably kill the market if it is
enacted as originally proposed.
How much of a slowdown do you anticipate
in multifamily originations in 2012?
I cannot put a number on it. But at least in our portfolio, we saw a lot of tenant demand in 2011 and the
second half of 2010. A lot of volume in ’ 11 was tenant
demand from prior years. This tenant demand will
obviously not be repeated. It is entirely possible that
we can see a multifamily origination drop year-over-year even though fundamentals look pretty good.
The wild card there will be the amount of acquisition
activity that goes on.
What is your advice for brokers?
You have to focus on deals that make sense, and on
deals that lenders are going to be interested in. Today’s lenders are more interested in stable properties, lower leverage and sponsors who have a good
track record. The commercial mortgage banking business is much healthier today. Folks are feeling much
better about the financing environment, and I think
that optimism will carry through 2012.
For more from Burke on the state of commercial mortgage-backed securities, see Page 22. For the complete interview,
see our exclusive online content at sctsm.in/4935.
Rania Oteify is an associate editor at Scotsman Guide. Reach
her at (800) 297-6061 or firstname.lastname@example.org.