January 24, 2013
Few asset classes can boast a convergence of favorable circumstances to rival that of the apartment sector. Whether by choice or necessity, record numbers of American families have swelled the rental ranks since the onset of the housing market collapse, fueling the robust property fundamentals that undergird the sector’s post-crisis investment thesis.
Absent stronger economic foundations for space demand, no other property sector has evinced a similar pattern; and so, nearly four years after the economy’s return to expansion, apartments continue to define the recovery in commercial real estate. But the sector’s outperformance cannot persist indefinitely. In 2013, firming housing market conditions will coincide with the cycle’s first measurable increases in apartment supply, moderating property income trends and reinforcing the need for risk management in new lending.
Priced Near Perfection
Investors, developers, and lenders have all responded to the momentum in apartment fundamentals trends, lifting multifamily valuations and raising debt encumbrance to within range of their previous peaks. Dallas-based research firm Axiometrics reports the apartment vacancy rate was comfortably below 6 percent heading into 2013, supporting rent growth well in excess of renters’ current income trajectory. Cap rates on property sales and refinancing appraisals have also tested new lows over the last year, falling well below 5 percent for the most aggressively contested assets.
In divining the relationship between fundamentals and liquidity, the availability of historically low-cost financing has been a critical input in the multifamily equation. When dislocations in credit markets were most severe, Fannie Mae, Freddie Mac, and the Federal Housing Administration ensured the flow of capital, even in submarkets where the sector’s occupancy rates and income trends were deteriorating. Following the sector’s inflection, banks, life companies, and conduit lenders have all re-engaged with borrowers, fomenting a degree of competition that raises questions about the soundness of apartment underwriting trends.
The Wake of the Housing Crisis
For many advocates of the new apartment paradigm, flush credit conditions reflect a secular shift in multifamily demand that will persist even after… Read more…