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The Coming Rental Housing Wave

Multifamily SVP David Brickman The apartment market is the housing industry's and the broader economy's poster child for good news and optimism. It's an exciting time to be in this growing sector where it is projected that $1 trillion in capital and 10 million additional apartment units are needed in the next 10 years as more individuals turn to apartment living.

The market growth is influenced by changes in demographics and consumer attitudes toward renting. The move from owning to renting reflects financially stressed households (who may face short sales or foreclosure of homes they had owned) and an increase in young and newly formed households who have decided to postpone homeownership in favor of renting during unsettled economic times. In fact, the decline in the homeownership rate has been sharpest for those household heads under 30 years of age.

Consider these facts:

  • Renters make up more than 40 million households – about one third of U.S. households.
  • For every one percent that the current homeownership level of 66 percent decreases, one million individuals become renters.
  • The demographics show a significant increase in immigrants, 20-34 year olds, and baby boomers entering the rental market.

In the last 12 months ending mid-year 2011, 1.4 million households moved into rental housing, while rents and occupancy rates have steadily increased due to the limited supply of apartments. There has also been virtually no new apartment construction in the last two years, which means demand will outpace supply in the next few years. In addition, many older buildings are in need of renovation. In fact, the median age of apartment buildings nationwide is almost 40 years. The good news is that new construction projects are underway in some metropolitan markets, with plans for more. I recently read an article about how "the most migratory of birds, the construction crane" has returned to Philadelphia. However, construction activity is still a fraction of what it needs to be, and what it was for much of the 1990s and 2000s.

In the last few months I've talked with lenders, borrowers, and investors about these trends and the positive change in the country's attitude toward the benefits of renting. I also heard their views on multifamily market conditions in their local areas, the majority of which are recovering, and the relatively few that are not doing so well.

In these conversations, I reflected on the remarkable performance of Freddie Mac's Multifamily area – how we've been financing loans in every market condition and industry crisis. During the past 20 years, Freddie Mac Multifamily has been a consistently profitable business with strong credit management and some of the lowest delinquency rates in the country, all while serving the affordable rental market. And more recently, since we began securitizing multifamily loans in 2009, our strong securities performance has translated into highly competitive mortgage pricing for borrowers and has generated strong investor interest.

The bottom line is that the multifamily market is poised for growth due to strong demand, healthy fundamentals, and limited supply. These trends have renewed interest in the sector and investors are returning as evidenced by an increase in acquisition and refinancing activity. This is good news for America because rental housing makes economic contributions to the community by creating jobs and providing residents that can support local businesses. Given Freddie Mac's track record and ability to provide leadership and innovation in the multifamily market, we also look forward to serving the future needs of renters in America by focusing our expertise, relationships, and ability to leverage private market capital to deliver the mortgage financing that will be needed by this growing sector in the future.


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