Multifamily: Too Much of a Good Thing?

Thu, 2012-04-26

Multifamily investment sales continue to outpace other commercial property types in terms of growth of volume year over year. Multifamily sales in the first quarter were up 33% compared to a year earlier and were up 52% in 2011 compared to 2010.

In preliminary full first quarter numbers, CoStar Group is showing nearly $14 billion of apartment property sales in the first quarter vs. $10.5 million a year ago. The segment recorded $64.6 billion in sales last year vs. $42.5 billion in 2010.

The health of the market has caused some to question current market property enthusiasm and valuations. However, new analysis from Fitch Ratings, Moody's Investor Services and Freddie Mac dispel some investor concerns by reporting that market fundamentals appear to support current valuations.

According to new research from Freddie Mac, while multifamily property values are increasing, they remain an average of 26% lower than the market's peak in early 2007.

And multifamily cap rates in January 2012 were 40 basis points lower than the average between 2000 and the present, Freddie Mac economists estimated.

Multifamily property values fell 40% from peak to trough. Since reaching a low in the third quarter of 2009, values have recovered to 2004 levels but are still 25% lower than the peak in 2007, the firm said.

Demand Way Outpacing New Supply

Even if the supply pipeline was filling up faster, it would still be outweighed by demand. Low levels of new apartment construction, an improving employment picture, and the weak single-family housing market have been contributing to robust fundamentals in the multifamily housing sector in the U.S., Moody's Investors Service reported.

"For the multifamily REITs, the strong fundamentals have pushed occupancy and cash flow growth past recent highs, which in turn have led to meaningful improvements in credit metrics," said Chris Wimmer, a Moody's vice president, senior analyst.

Moody's noted that pipelines of new development have been expanding, however, given inexpensive capital and strong investor interest in the multifamily sector, "We do not foresee dangerous levels of new supply nationally for at least the next 12 months, though some specific submarkets could show some strain, and there may be enough new construction to moderate rents," Wimmer said.

Despite a reversal in the decline in multifamily completions in 2011, the supply of new multifamily units remains well below its historical averages.

At the same time, the demand for apartments has been growing despite the lackluster employment picture. Moody's noted that much of the new hiring has been among the younger members of the population, who are significantly more likely to be renters rather than owners.

Excerpt from the article written by Mark Heschmeyer for Click here to view the original article in its entirety.

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