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Perspectives
October 26, 2015

Still a Golden Age for the Multifamily Market

David Brickman
By
David Brickman, EVP Multifamily Business

Growth: In the multifamily mortgage market, in rental demand, in our business, inn demand for affordable housing. For good reason, the topic dominated discussions at our annual Multifamily Customer Conference, held a couple of weeks ago in Chicago.

Reflecting that growth and now topping 900 attendees from across the industry, ours was, we believe, the country's biggest conference focused exclusively on multifamily housing finance.

The multifamily market has enjoyed five straight years of growth. Multifamily mortgage debt outstanding is growing and accelerating. Fueled by continued growth in the stock of multifamily properties and the rise in multifamily property values, it exceeded $1 trillion earlier this year. Construction starts and completions have increased, with a total of around 900,000 new apartments added to inventory since 2010.

In the same period, property values more than doubled. The 20-plus percent growth in mortgage debt since 2010 pales in comparison to these robust growth rates. Indeed, the growth in multifamily values and units suggests that it is not merely a cyclical peak caused by what some call the "wave of maturities" associated with loans originated in the 2005-2007 period. Rather, the growth in multifamily mortgage activity appears to be a secular trend that is just now starting to catch up with the growth that already has occurred in the aggregate value of the multifamily capital stock.

In addition, the increased inventory does not seem to be a significant concern in terms of fundamentals. While a few sub-markets in a handful of metropolitan areas might be temporarily overbuilt, renter demand for the most part continues to absorb new supply as occupancy levels and rental growth rates continue to exceed their historical averages.

In recent years, demand for apartments has grown substantially. Drivers include changing demographics, shifting views on housing, and a new urbanism in many metro areas. The improved employment rate also contributes to demand; more households are forming – as historically expected, but also as people who deferred moving into their own homes in the wake of the Great Recession start to set up households. This is in part why vacancies stand at a 14-year low, despite continually rising rents.

How durable are the recent gains? The market is expected to remain strong in the foreseeable future, as described in our Multifamily Outlook Second Half 2015. And the results of our quarterly housing survey validate the economic data. Although not conclusive, they reveal that preferences for renting have strengthened – behaviors do appear to be changing.

Freddie Mac Multifamily's business has grown bigger and more diverse as a result. At last year's conference, I told customers that they should be able to look to our partnership in all corners of the multifamily arena. Through remarkable, collaborative efforts and leadership, now they can. Our organization has grown accordingly. And we continually work to enhance our offerings and services.

On the flip side of all of this good news, concerns about affordability and capital market volatility are growing.

With demand still exceeding supply, construction costs rising, and wages continuing to lag, too many renters are hard-pressed to find available apartments they can afford. . In fact, many survey respondents stated that they cut back on food, health care, and other essentials to pay the rent. The situation has been called an affordability crisis by many industry experts, and I have to agree.

And while I'm bullish on multifamily's prospects, it's important to remember that global markets are interconnected – as the saying goes, one country sneezes and the world catches a cold. As multifamily becomes a bigger part of the securitization landscape, it becomes more susceptible to shocks – even those that seem to have little to do with real estate or the multifamily market, such as China devaluing its currency or the Federal Reserve debating an interest-rate hike. If investors pull back because they're feeling queasy – for whatever reason – they affect access to capital. So the challenge seems to be as much about capital flows as about market fundamentals.

Our mission – to provide market liquidity and stability and promote affordability – takes aim at these issues. We constantly work to help give the industry the support it needs and serve as a sort of shock absorber against economic stresses. About 90 percent of the apartments we provide funding for are affordable to households earning area median income or less. Affordability has always been a focus, and we've concentrated efforts with our customers in the last couple of years to help chip away at the issue.

In the coming year, Freddie Mac Multifamily will continue to apply industry expertise and innovation to support market needs and growth. Affordability and workforce housing will remain our priorities.

  • We'll continue to focus on small-balance loans, manufactured housing communities, and seniors and targeted affordable (government subsidized) housing.
  • Among other opportunities we're investigating:
    • Expanding in the green space and perhaps rural workforce housing
    • Developing additional ways to drive capital into rehabilitation, renovation, and preservation of affordable housing. To do this, we'll enhance our Moderate Rehab and Value-Add offerings and expand our Bridge to Resyndication offering.
  • We'll still support conventional market-rate properties – all in proportion.

The Freddie Mac Multifamily team feels privileged to be part of this industry and appreciates our customers' partnership in moving multifamily rental housing forward. Coming together like this each year, we take the opportunity to inspire and engage with each other and to explore how we might better support multifamily housing. Because everyone deserves to live in a safe, adequate, and affordable home.

Read a recap of the Freddie Mac Multifamily Customer Conference.

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