Investment Real Estate 2010: Multi-family

Even in Savannah, the dream of home ownership has caused many to wake up in a cold sweat. Since 2007, values have dropped nationally 18.4% on average and may drop another 10% before stabilizing this year.

A threat to stabilization, another potential wave of foreclosures, is a concern due to both unemployment, and an estimated 40% of all homeowners owing more than market value.  Foreclosures are expected to impact 12 to 15 million people while decimating credit scores.  Combine this with the challenge of obtaining financing in general and renting may look like a safer and easier alternative.

According to the Urban Land Institute’s recent report, “Housing in America: The Next Decade,” these concerns have created a shift in the perception of home ownership and could be viewed as a precursor for investors to consider multifamily.

For example Generation Y’s 83 million late teens to early thirties, are the prime age to start households. Instead, they have moved back home, doubled up or gone back to school while the economy drags along.  As the job market improves they will move into the housing market but with a bias towards renting verses “risking” their limited incomes in homes that might lose value.  Boomer’s in their 50’s, who on average have a home mortgage twice their income, will likely have to rent when they retire.

Overall, home ownership has dropped over the last 5 years. At a peak of 69% in 2004, it is predicted to continue creeping down to 62% to 64%, back to pre 1990 levels.

Supply and Demand

U.S. multifamily vacancy rates ended 2009 at 30 year highs. With most of the rent and vacancy declines leveling off, this is good news for investors because purchasing properties at present “depressed” incomes (down 10% to 30%) will allow your return to significantly improve as vacancies drop and rents rise. 

2009 saw very few new deliveries.  Only 100,000 units were delivered in 2009 with only 65,000 units projected for 2010.  According to NAI Global’s chief economist Dr. Peter Linneman, we need 320,000 units per year just to replace those units that are destroyed by fire, flood, etc.  

As the economy improves, pent up demand combined with normal growth should outpace supply by mid 2011 with shortfalls through 2014 according to the National Association of Home Builders.  Linneman believes we could see 3.2 to 3.4 million new households formed over the next 2 years that will help support both single and multifamily.  Market rents will increase by 8 to 10 percent through 2012 and 4 to 7 percent through 2015. 

Financing and Inflation

Lack of conventional financing is the major cause for low deliveries of new apartments. HUD’s 221(d)4 program has been fueling many new projects with 40 year terms and high loan-to-value financing. Freddie Mac and Fannie Mae offer refinancing at attractive fixed rates for 5 to 10 year terms.

As the potential for inflation increases over the coming years, especially for “all cash” buyers, the ability to hedge against inflation with higher rents makes investing in multifamily an attractive play. 

It’s No Secret

Nationally, there has been an uptick in sales as the word has gotten out.  3rd quarter ’09 sales volume was up 40 percent over 1st quarter ’09.  As a broker, I see real signs of increased interest and actual transactions in the sector that should start stabilizing prices.  REITs and conventional lenders are warming back up to multifamily as well.

In the Savannah area, there has been very limited activity in land or existing product sales.  There are potential multifamily deals here and in the region, but national markets targeted for investment include: Washington, D.C., San Diego, New York, Minneapolis-St. Paul, Raleigh, and others. 

There could still be challenges through 2011 and investment in the sector should be made cautiously, but there are clear signs that multifamily will be the first sector to recover as the economy gets back on track.

Rex Benton is Savannah Commercial Real Estate agent with  NAI Savannah, a division of Mopper-Stapen, Realtors and is a contributing columnist for BiS-Business In Savannah weekly business publication. www.mopper-stapen.com 912.238.0874 Office Retail Industrial Investment Real Estate