2010 Residential Rental Housing Market – National Outlook

by Property Management Software on May 27, 2010

The rental housing market, like most sectors, has taken a few more lumps than anticipated in 2009 as the economy continues its struggle towards recovery.

National Housing Market

National Housing Market

The demand for apartments weakened as vacancy rates grew 7.2 percent earlier in the year – up 60 basis points from December 2008. Unemployment, resulting from the higher-than-expected rate of job losses, has put downward pressure on household formation. As a result, many renters have taken defensive measures by doubling up or moving in with family until their financial positions improve.

Current market conditions, driven by deep reductions in home prices caused by foreclosures and the $8,000 government tax credit being offered to first-time home buyers, are making it more attractive for current renters to purchase homes.

At the end of 2Q, apartment completions were down by 45 percent. However, this represents only a modest drop when matched against 2008 due to lending activity by Fannie Mae and Freddie Mac, who have reduced their new multi-family loan originations, but only by 26 percent. While lending remains tight, apartment rentals are actually performing better than other property sectors.

This became more evident in August 2009 as housing starts hit their highest levels of the year, increasing 1.5 percent, while building permits were up 2.7 percent, according to the U.S. Department of Commerce. “All of the increase was in the multi-family segment of the housing market: starts spiked up 25.3 percent for multifamily.”

Despite a rocky short-term outlook, might this be a ray of light for the long-term health of the multi-family housing market? Can a case be made for investors to resume their quest for apartment property deals? Doug Bibby, President of the National Multi-Housing Council, votes yes and believes that “For investors with an intermediate to long-term horizon, the American apartment industry offers superior return expectations to practically any other sector of real estate.”3 This issue of Perspective will provide you with insight, planning strategies and best practices to help your organization:

• Clearly understand the current national operating fundamentals
• Identify opportunities in selected markets
• Adopt technology to source and screen tenants

National Operating Fundamentals Overview

The apartment forecast published in August 2009 by the National Association of Realtors (NAR) in conjunction with Torto Wheaton Research (TWR) suggests that the “market will continue to struggle in the second half of 2009, but return to stronger demand and rent stabilization in 2010.” The NAR/ TWR apartment forecast also indicates that in 2010, increased demand and decelerating apartment stock growth rates are expected to create the forces that will push the vacancy rate down. As a result, the national apartment vacancy rate is estimated to drop to 7.1 percent by the end of 2Q 2010 and average 6.9 percent for the whole year.

Based on these predicted supply-demand dynamics, the average U.S. apartment rent, which declined 1.2 percent in the second quarter of this year, is expected to stabilize in the second half of 2009, registering a negligible drop of 0.1 percent in the third quarter and a minor increase of 0.4 percent in the fourth quarter. Property owners are contributing to this by competing vigorously to retain and attract renters through concessions that have exceeded 7 percent of asking rents.

In 2010, average U.S. apartment rents are expected to remain relatively stable and score a small increase of 0.8 percent resulting from a positive net absorption and declining vacancy rates.

Although the NAR/TWR apartment forecast is focused on the national level, it implies that “Investors should carefully evaluate the dynamics of the local markets within which they operate before they assume any apartment rent increases for 2010 in their cash flow models.”

New apartment supply has diminished and is expected to hit 80,000 units vs. 107,000 units in 2008. Based on this constricted pipeline, completions are forecast to slow down though the remainder of the year and then fall off again in 2010. This should set the stage for a relatively rapid recovery as the multi-family sector finds its floor and the economy begins its recovery.

Actions being taken by Freddie Mac to secure $1 billion in multi-family loans originated in 2008 are a welcome sign of optimism. This effort represents the first full-scale securitization for Freddie Mac and the first Commercial Mortgage-Backed Securities (CMBS) issuance since the market slowed last year. If its charter issue succeeds, Freddie Mac could move ahead with a second securitization of multi-family debt in late 2009. This potentially welcome shifting of sizable debt from its balance sheet will facilitate the freeing up of capital for a new wave of multi-family lending.

Over the next few years through 2012, over $300 billion in multi-family housing loans will be approaching maturity. This includes $36 billion in CMBS mortgages. Current indications are that more than 70 percent of the new multi-family CMBS loans reaching maturity during that time may not qualify for financing. For well-capitalized investors with patience, this could present attractive acquisition opportunities as properties enter the market.

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