United States

Data show multifamily housing cooling

Starts and permit activity down from 2016 levels


Multifamily housing finance has had a robust start this year and, by some industry estimates, it may match or surpass 2016 business volumes. However, some U.S. government data may offer early hints that activity in this segment of housing--as measured by multifamily starts and permits–is cooling off from 2016 levels.

Demand for multifamily housing, construction activity in this segment of commercial real estate and the finance of these properties have been robust in the wake of the credit and housing crisis. New construction and financing activity related to this property type has trended higher amid a decline in the U.S. homeownership rate to 63.7 percent, as of the second quarter of 2017, from 69 percent in 2004. The homeownership rate was as low as 62.9 percent in the second quarter of 2016, according to the U.S. Census Department.

That shift in housing has been reflected in multifamily prices. Apartment property prices are up about 54 percent above their pre-crisis peak level, according to a report published by Moody’s earlier this year.

A large portion of the multifamily finance universe has been driven by U.S. housing agencies where, for one agency, funding activity was up during the first half of the year from the same period in 2016. Agency collateral continued to account for a bulk of the debt resold into commercial mortgage-backed securities (CMBS) and yield premiums for these securities were narrower at midyear from year-ago levels.

When it comes to building activity, U.S. government data show that starts and permit activity are down from year-ago levels. Permits for properties with five units or more showed a 14.6 percent month-over-month seasonally adjusted increase in June from May, but they are off 2.4 percent from year-ago levels, according to the U.S. Census Department. Starts for properties with five units or more showed a similar pattern. Housing starts for this segment of the housing market showed a 15 percent seasonally adjusted gain in June from May but starts for properties with five or more units were down 10.7 percent from a year ago.

When it comes to multifamily finance, the U.S. housing agencies have been active in 2017, following a robust 2016, and finance of multifamily properties could equal last year’s levels if not exceed them, some observers say.

Lending for multifamily properties tied to Fannie Mae programs was at $29.7 billion as of June, up from the same period a year ago when it totaled $22.8 billion. In 2016, Fannie Mae related multifamily financing for the full year totaled $55.3 billion, up from $42.3 billion in 2015.

The increase in multifamily lending, and general activity in this segment of commercial real estate, is tied to a strong U.S. economy–specifically a strong jobs market that has fueled demand for multifamily housing–and demographics, according to market observers. These industry observers warned, though, that an influx of new supply could pressure rents and send vacancy rates slightly higher.

When it comes to the resale of commercial property debt into securities, issuance of U.S. CMBS totaled just over $57 billion as of June. Much of the issuance was driven by collateral from housing agencies Fannie Mae and Freddie Mac. In the first two quarters of 2017, 60 percent of all commercial property debt resold into CMBS, or $34.4 billion, was agency collateral. Agency debt accounted for $82.67 billion, or 52 percent, of all collateral resold into CMBS in 2016.

Securities backed by pools of commercial properties, including multifamily, saw demand from investors in search of extra yield. Yield premiums of 5-year (CMBS 2.0, CMBS 3.0) AAA-rated bonds pooling commercial mortgage debt were at 50 basis points in June, down from 79 to 80 basis points at the same time a year ago.

AAA 5-year CMBS spreads tighter from year-ago levels

Lower rated classes of CMBS also declined year over year. In June, BBB-CMBS was at about 470 basis points over swaps, in from 615 basis points in June 2016. They were as wide as 542 basis points in January 2017.

BBB- CMBS  yield premiums narrower from year-ago levels

Meanwhile, multifamily delinquencies were at 0.24 percent in June, up slightly from May’s 0.22 percent. They are down from July 2016 when they were at 0.31 percent, and they started the year off at 0.27 percent.

When it comes to who holds much of the multifamily debt, data from the Mortgage Bankers Association (MBA) may offer a clue. According to the industry group, the largest holders of multifamily mortgages are commercial banks. Government-sponsored enterprise (GSE) portfolios and MBS follow as the second largest holders of multifamily mortgages. The industry group said in a report published earlier this year that multifamily mortgage debt outstanding rose to $1.17 trillion at the end of the first quarter of 2017, up $23.4 billion or 2 percent, from the fourth quarter of 2016. Total commercial and multifamily debt outstanding rose to $3.01 trillion at the end of the first quarter of 2017, the first time it broke the $3 trillion level, according to the MBA.

Much of that gain was tied to increases in multifamily mortgage debt outstanding, and 80 percent of that came from portfolios and MBS-held or guaranteed by federal government agencies and the housing agencies.   

While lending activity has been robust, there may be some indicators that suggest a slowing in the broader commercial real estate markets.

For example, the Green Street Commercial Property Price Index–a measure of unleveraged U.S. commercial property values that captures the prices at which commercial real estate transactions are currently being negotiated and contracted–was slightly lower from a year ago.

In June 2017, that index recorded a reading of 125.5, down from 125.8 in the same month a year ago. The index has flattened out as higher cap rates have offset growing rental income. “Cap rates for most types of property have been moving up, which is acting as a headwind for values. Price declines have been largest in the retail space, while industrial, medical-office and life-science properties continue to hit new highs,” according to a Green Street report published in July.

While there may be signs that some corners of commercial real estate may see declines in prices, multifamily likely will benefit over the long term from demographics.

According to a report published earlier this year by Harvard’s Joint Center for Housing, projected household growth will add 8.9 million homeowner households and 4.7 million renter households by 2025. By 2035, projected household growth will add 15.7 million homeowner households and 9.4 million renter households.

This article, authored by Rick Edelheit, was originally published September 8, 2017 in RSM's The Real Economy Vol. 33

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Richard Edelheit
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