Though the apartment market is seeing signs of financial stabilization, and the longer-term outlook for apartments remains good, in the short run the statistics are rather bleak.
Transaction volume in 2008 was down by more than 60% compared with the 2007 peak, and volume for the first half of 2009 dropped by 77% compared with the same period a year earlier.
The debt markets remain tight, and both short- and long-term capital are still difficult to obtain. While some insurance companies have become active lenders on a limited basis, their business is a fraction of what it was just 18 months ago.
Fortunately, the apartment industry has benefited from the availability of mortgage capital provided by Fannie Mae and Freddie Mac, and more lenders have also looked at the Federal Housing Administration (FHA) as a source of capital, especially for construction finance. Even so, liquidity is likely to remain an issue for some time.
Policymakers are becoming concerned about the growing number of distressed apartment properties. Much of the issue has been relegated to properties financed with CMBS debt that was not prudently underwritten and that relied upon faulty assumptions of future rent growth as opposed to existing income.
As a result, we are seeing more CMBS loans in the apartment sector at risk of default or in foreclosure.
Insurance company, agency and FHA loans appear to be in relatively better shape, but added stress in their portfolios can be expected, including loan defaults.
Developers moved to the sidelines beginning in 2008. What new construction occurred were projects that were financed and already in the development process. Where owners and investors could defer the construction, most projects were placed on the shelf.
New development is expected to remain dormant until 2011, and even that is subject to a return of job growth in 2010.
Necessary ingredients
Demand for apartments depends on employment and demographics. The 2001 economic recession was brief and shallow. Yet it was accompanied by the biggest two-year drop in the number of renters that we've ever witnessed.
This time, the economic downturn has seen the largest drop in employment in the postwar era, more than 7 million jobs. While some markets will rebound earlier, most industry experts don't expect improvement before the second half of 2010 at the earliest.
There is evidence that, as with the last recession, employment will be slow to recover when the economy does turn around. There also are concerns that foreclosures may spike again in the residential mortgage market.
One problem for the apartment industry is that a sustained falloff in employment leads to more “doubling up” — people living with their parents or taking on roommates, which would reduce the demand for apartments and other types of housing.
While data on this trend are anecdotal, according to apartment search engine MyNewPlace.com, starting in the first quarter of 2009 there was a shift as searches for three-bedroom apartments eclipsed searches for one-bedrooms.
Earlier in this decade, multifamily owners and managers competed against an unprecedented move to single-family housing. Now in many markets we have seen more competition from homeowners unable to sell who rent out their individual and investment properties.
NMHC has produced a brochure, “Your Best Start to Renting Smart: Rent from the Pros,” to help apartment firms compete with the shadow market. For consumers, the brochure highlights the peace of mind that comes from renting at a professionally managed property.
Upside for apartments
Demographic trends are favorable for the apartment market over the next decade and beyond. In fact, the percentage of U.S. households that rent has increased to one-third of all households, as the homeownership rate continues to drop from its peak of 69% in 2004.
In 2008 alone, renters occupied 63% of net new households. As echo boomers enter the housing market, usually as renters, by 2015 there will be 67 million people in their prime renter years.
Finally, one positive consequence of the residential meltdown is that many more people are questioning whether home ownership really is the best answer. Buying a house entails risk, which means putting all your eggs in one basket.
Doug Bibby is president of the National Multi Housing Council in Washington, D.C.