December 12, 2016

Multifamily Is On a Roll

David Brickman
David Brickman, CEO

2016 was a very good year. Freddie Mac Multifamily is on track to purchase approximately $55 billion and securitize over $50 billion in loans – both new records. Barring any surprises, we believe the multifamily industry – and our business – can grow another five to ten percent next year.

We're confident because the multifamily market is being driven by solid economic fundamentals rather than leverage and speculation. We also believe the fundamentals the market tracks, including values and rents, appear likely to continue growing, albeit at a more moderate pace.

On the demand side, renter households are poised to grow in every generational cohort due to a range of economic and demographic factors. Positive job growth and a stable economy should help more Millennials form households and enter the market. Yet, the combination of sluggish income growth, rising home prices and higher mortgage rates will probably delay homebuying by many Gen Xers and prolong their tenure as renters. Finally, a significant fraction of the nation's 67 million aging Baby Boomers are poised to downsize into more easily managed rental units.

On the supply side, absorption rates and occupancy levels exceed their historic averages. Tightening conditions for construction lending, plus significantly rising construction costs are likely to slow the pace of new deliveries. This will help mitigate the risk of overbuilding and keep inventory levels tight in all but a few markets.

Rents are, therefore, likely to rise in most markets. The exceptions are those select few coastal markets where the friction between elevated rents and modest income growth – combined with relatively strong deliveries of new product – should slow or flatten rent growth for the next year or two.

Properties also are being priced fairly in most markets. Any assessment of relative value of multifamily to other real estate sectors, let alone other asset classes, suggests a healthy risk-return balance. This, plus the still low level of long-term interest rates and the stable growth in net operating incomes, provides a healthy environment for multifamily investment.

When we take these factors together with today's generally strong economy, we project annual new multifamily originations to keep expanding, albeit at a more moderate pace, and reach an estimated $335 biilion in 2020. Regarding mulitfamily mortgage debt outstanding, which reflects current growth in the stock and market value of existing mulitfamily properties, we expect the market to fund more than $1.8 trillion in new multifamly originations over the next five years.

This forecast assumes a stable political and geo-political environment that will keep interest rates on 10-year Treasuries in or only slightly higher than their November post-election range.

Although the ultimate impact of the last election on the multifamly industry remains to be seen, we do see the national shortage of affordable rental housing continuing.

Large percentages of Millennials (68 percent), Gen Xers (70 percent) and Baby Boomers (62 percent) live payday to payday or can't afford basics, according to our latest Renter Profile. At the same time, CoStar Group, a commercial real estate information group, recenty estimated the country has only 5.6 million affordable rentals left. Over half of them are more than 30 years old, and existing stock is reportedly diminishing quickly. In addition, the Joint Center for Housing Studies says there are over 21 million cost-burdened renters in the U.S. and that their numbers are expected to rise another 4.4 million by 2025.

Finding a solution to the affordable rental housing crisis is the most critical issue our industry faces.

It is also part of Freddie Mac's mission, which is to preserve, expand and improve America's affordable rental housing. This past year we introduced new products, including our Green Advantage, Small Balance Loans, Moderate Rehab, and Bridge to Resyndication that are already surpassing our expectations. Approximately 90 percent of the eligible projects we finance are affordable.

Looking forward we see new opportunities for innovation and experimentation by collaborating with our customers.

We are well positioned to grow in lockstep with the industry, set new funding records in the years ahead, and find better solutions to the nation's rental housing challenges.

For the last seven years the multifamily industry has been on a roll. While it would be hard to replicate that success going forward, I believe we will continue to see healthy, and hopefully balanced growth in 2017 and beyond.