Strong multifamily performance

STRONG MULTIFAMILY PERFORMANCE Investor returns on rental properties continued to climb last year. The National Council of Real Estate Investment Fiduciaries reports that net operating income for commercial-grade apart-

ments increased for the fifth consecutive year in 2015, up nearly 11 percent from 2014. The annual rate of return on rental prop- erty investments rose to 12 percent, driven in large part by price appreciation. This strong performance has attracted investor demand, pushing capitalization rates for apartment properties down to 4.8 percent by year-end—the lowest level since the third quarter of 2008.

According to Moody’s/RCA Commercial Property Price Index, prices for apartment properties rose 13 percent in 2015, mark- ing the sixth consecutive year of double-digit growth. As of March 2016, apartment property prices stood 39 percent above their previous peak in late 2007. By comparison, the CoreLogic index indicated that single-family prices remained 5 percent below their pre-recession high. Prices for apartment properties in highly walkable central business districts increased the most last year (19 percent), while those in car-dependent suburbs rose somewhat more slowly (13 percent).

While strong nearly everywhere, apartment property prices in certain markets have skyrocketed. As of the fourth quarter of 2015, prices in the New York metro area stood 93 percent above their previous peak, while those in San Francisco were up 85 percent (Figure 31). Apartment prices in Boston, Denver, and Washington, DC, also topped previous peaks by more than 50 percent. In contrast, property prices in Las Vegas and Phoenix were up more modestly, likely because of the large oversupply of single-family homes available to meet rental demand.

With rental property prices on the rise, delinquency rates for most types of multifamily loans fell in 2015. The share of mul- tifamily loans held by FDIC-insured institutions that were at least 90 days past due or in non-accrual status dipped to just 0.28 percent in the fourth quarter, down from 0.44 percent a year earlier. In addition, the Mortgage Bankers Association indi- cates that 60-day delinquency rates for commercial/multifamily loans held by life insurance companies were at 0.04 percent, comparable to rates for loans held by Fannie Mae (0.07 percent) and Freddie Mac (0.02 percent).

Multifamily loans held in commercial mortgage-backed secu- rities (CMBS) posted a sharp drop in what had previously been relatively high delinquency rates. According to Moody’s Delinquency Tracker, the share of CMBS loans that were 60 or more days past due, in foreclosure, or in the lender’s possession peaked at nearly 16 percent in early 2011 before steadily retreat- ing to about half that share at the end of 2015. The share then fell to 2.1 percent in early 2016, but still more than double the 0.9 percent average in 2001–2007.

Unusually strong market conditions and historically low inter- est rates helped to propel a sharp rise in multifamily loan origi- nations last year. The MBA Originations Index indicates that the dollar volume of multifamily loans originated increased 31 percent in 2015. Meanwhile, total loans outstanding (including

Source: Moody’s Investors Service and Real Capital Analytics, Commercial Property Price Index for Apartments.

● New York ● San Francisco ● US ● Phoenix ● Las Vegas

550 500 450 400 350 300 250 200 150 100 50 0

2003 2005 2007 2009 2011 2013 20152001

Apartment Property Prices in Hot Markets Have Surged Well Above Previous Peaks Apartment Price Index





both originations and repayments/write-offs) shot up by nearly $100 billion, to more than $1 trillion.

Bank and thrift balances rose by $47 billion (16 percent) in nomi- nal terms over the past year, while debt backed by federal sourc- es increased by $48 billion (11 percent). The federal government held or guaranteed 45 percent of all outstanding multifamily mortgage debt in 2015, a large share by historical standards. With Fannie Mae and Freddie Mac still in conservatorship after nearly eight years, the government’s future footprint in the multifamily lending market remains an open question.

THE OUTLOOK Rental demand is expected to remain robust over the next decade as the youngest members of the millennial genera- tion reach their 20s and begin to form their own households. Moreover, if homeownership rates for households in their 30s and 40s continue to slide, rental demand will be stronger still. For their part, the aging baby-boom generation will boost the

number of older renters, ultimately pushing up demand for accessible units.

It is unknown whether high-income households will continue to fill the growing inventory of higher-end rentals or make the transition to homeownership. Regardless, expanding the rental supply through new market-rate construction should provide some slack to tight markets as older units slowly filter down from higher to lower rents. Once high-end demand is sated, developers in some areas may turn their attention to middle- market rentals, although high development costs mean that building new units affordable to even moderate-income house- holds is difficult without government subsidies.

And without public subsidies, the cost of a typical market-rate rental unit will remain out of reach for the nation’s lowest- income households. Indeed, with housing assistance insufficient to help most of those in need, the limited supply of low-cost units promises to keep the pressure on all renters at the lower end of the income scale.

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