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No Bubble In Multifamily Values, According to Freddie Mac

GSE Reports Appreciation Has Moderated for Multifamily Property Over Past Year In Latest Housing Outlook
September 23, 2013
Renter household formation has outpaced owner household growth during the past few years, spurring a huge increase in multifamily property sales and new construction.

Despite the boom in multifamily sales and development, Freddie Mac's latest Economic and Housing Market Outlook found that residential property values "remain consistent with fundamental economic forces in the housing market," and that the rate of appreciation for multifamily property values moderated over the past year.

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Many investors have made note of the cap rate compression in the multifamily space. The American Council of Life Insurers (ACLI) reports cap rates on apartments with new mortgages made by life insurers have fallen, dropping from 8.9 percent in the first quarter of 2003 to 5.77 percent in the second quarter of 2013, a 35 percent decline and the lowest recorded by ACLI since the series’ inception in 1965.

Yet Freddie Mac's chief economist Frank Nothaft said he believes housing values remain linked to market fundamentals and that cap rate compression in the multifamily sector may have bottomed.

"The decline in cap rates and growth in rents (adjusted for inflation) are key fundamentals that explain the rise in apartment values over the past decade,” said Nothaft. “Seen through this lens, the rise in property values appears to be consistent with overall economic forces, and the slower appreciation over the past year reflects the bottoming of cap rates. Cap rates are expected to gradually move higher in the coming year as long-term yields move higher, and rents are likely to outpace overall inflation, leaving apartment values firm and on solid ground."

They Rent Houses, Too

While the boom in new apartment construction is banking on continued stong renter household formation in years to come, the majority of new renters may not be renting traditional multifamily housing - defined as units in buildings with five or more rental units. Instead, more and more have been renting single-family homes, according Tanya Zahalak, Economist for Fannie Mae’s Multifamily Economics and Market Research.

Single-family rentals (which Fannie Mae defined as rentals in properties with one to four units) far outnumber multifamily rentals. The 2011 American Housing Survey identified 21.3 million occupied single-family rental units compared to 16.1 million occupied multifamily rental units. During the past few years, the increase in demand for rental units has tilted in favor of single-family rentals rather than multifamily units.

Despite the growth in the number of renters, Fannie Mae's National Housing Survey found that a slim majority of renters still aspire to purchase a house at some point in the future, with 51% of the renter respondents stating they would like to own a home someday.

Even more telling, approximately 57% of those aged 18 to 34 years old - the cohort most likely to rent, according to the Census Bureau - also stated that they aspire to own a home. That sentiment, coming from the nation’s young adults, may suggest to multifamily rental developers that perhaps this cohort is not likely to turn the U.S. into a “rentership society” - at least, not by choice.

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