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Millennials Maintain Multifamily Momentum, Spur Sustained Investment

But Look for Suburban Office, Industrial Properties To Start Competing for Bigger Share of Investment Dollars
September 24, 2014
The multifamily sector, especially rental apartment buildings, continues to be a hot sector for commercial real estate investors as it demonstrates sustained underlying strength.

Even as construction of new apartment buildings hit the highest monthly construction pace since the beginning of 2006, the latest absorption rates for unsubsidized, unfurnished, newly built apartments have kept pace. The Census Bureau reported that the latest 3-month and 6-month absorption rates for apartments had risen to 64% and 83%, respectively.

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Driving this strong demand is an increase in the number of tenant households, which have pushed apartment vacancy rates down to the lowest level since 2000, and on average, inflation-adjusted rents in the U.S. have returned to their prior peak levels of 14 years ago, according to Freddie Mac’s latest U.S. Economic and Housing Market Outlook issued this past week.

Millennials Playing a Large Role in Shaping Demand

Notably over the past four quarters, all the growth in net household formations has been among renters. The decline in homeownership rates has been primarily concentrated among younger households. For example, for those 35 years and younger, homeownership rate has fallen from 43.6% to 35.9% over the past decade.

Going forward, Millennials will continue to play a critical role in shaping housing demand over the next five years, according a new report by The Demand Institute. They are projected to spend $1.6 trillion on home purchases and $600 billion on rent, more on a per-person basis than any other generation in the next five years. Millennials will account for one in every four dollars spent on housing over this period.

According to the report, there will be 8.3 million new millennial households formed between now and the end of 2018 as these young adults increasingly venture out on their own, and most of these new households will be renters, acfcroding to the Demand Institute, a think tank jointly operated by The Conference Board and Nielsen.

"One important difference between Millennials and young adults in previous decades is the unique financial challenges of home ownership today, resulting from graduating into a weak job market with growing student loan debt," said Jeremy Burbank, vice president at The Demand Institute and Nielsen.

By necessity, Burbank said, many Millennials are exploring alternative approaches to housing finance, including single-family rentals and rent/own hybrid contracts such as lease-to-own.

Stepped Up Flow of Money

Despite a slow start in the beginning of this year, multifamily lending also has surged to support stepped-up investments.

According to CoStar COMPs data, multifamily sales were 52% higher in the second quarter this year than the same quarter a year earlier.

With interest in multifamily financing remaining strong, coupled with permanent financing needed for the new construction pipeline completing during the second half of the year, overall multifamily lending activity volume should be on par with last year’s level or perhaps up slightly, according to Kim Betancourt, director of economics of Fannie Mae’s Multifamily Economics and Market Research group.

Most multifamily market participants stepped up their financing activity during the first half of 2014, but at a lower overall level than a year ago, Betancourt added.

Second quarter 2014 saw increased activity from most market participants including life insurers, banks and thrifts - picking up some of the intentional slowdown in mortgage buys from Fannie Mae and Freddie Mac, via the Federal Housing Administration.

Fannie Mae acquired $8.1 billion in multifamily mortgage loans and Freddie Mac acquired $7.1 billion during the first six months of this year, compared to $16 billion and $13.5 billion, respectively, during the same period last year.

However, 30 private label commercial mortgage-backed securities (CMBS) deals were issued that had newly originated multifamily loans as part of the underlying collateral, compared to 16 private-label CMBS deals in the first half of 2013.

There was a significant increase in the dollar volume of these transactions in the first half of 2014: $6 billion compared to $1.3 billion for the first half of 2013. Of these private-label CMBS, approximately $5.1 billion were classified as multifamily collateral and another $970 million were classified as manufactured housing.

According to the American Council of Life Insurers, during the first six months of 2014, the life insurers’ multifamily commitment volume totaled $7.8 billion, up from $6.7 billion in the first half of 2013 - keeping them on an annualized pace to repeat last year’s record-breaking $16 billion in multifamily loan commitments.

Banks and thrifts once again had a robust increase in their net multifamily real estate loan holdings during the first half of 2014. The net change in multifamily holdings by the banks and thrifts increased by $18.4 billion during the first half of this year, compared to the nearly $10 billion increase in net multifamily holdings during the first half of 2013.

Increasing Competition for Investment Dollars

Multifamily property will remain at or near the top of most CRE investor wish lists in 2015, according to a recent report by Cassidy Turley Commercial Real Estate Services.

However, the firm’s researchers say that it will face more competition for dollars from other product types.

Until recently in the post-recession period, multifamily was competing mainly with trophy shopping centers and core CBD office product. That will continue, but Cassidy Turley's investment analysis projects other property types to increasingly compete for investor dollars.

With suburban office fundamentals finally on the mend, look for more investors willing to take on those perceived risks in 2015 as they pursue higher yields.

Meanwhile, industrial user demand has skyrocketed, thanks largely to the impact of e-commerce and the radical shifts it is creating throughout the global supply chain for retail in general, a fact that is increasingly attracting the notice of investors.
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