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NAR's Ratiu says multifamily could see long upswing

In June, the annual rate of new multifamily construction jumped more than 28 percent compared to the pace a year ago, the U.S. Census Bureau reported, indicating that a two-year boom in multifamily investment, originations and construction was showing no signs of slowing down. Other indicators, such as the long-term declining homeownership rate that hit its lowest level last month in nearly 50 years, suggests that people are favoring renting. 

In light of these trends, George Ratiu, director of quantitative & commercial research, National Association of Realtors, spoke with Scotsman Guide News about the short-term and long-term prospects for multifamily.

George Ratiu updated pic

Would you still rank multifamily the strongest commercial sector right now?

In terms of fundamentals, which looks at the leasing side, I would say a definite yes. Partly because when we look at vacancy rates it is still in the low 4 percent [range]. Our expectation for this year is 4.3 percent vacancy. It is a slight bump from last year’s 4 percent, but that is mostly because the pace of new construction has accelerated. In terms of investment sales, traditionally office property is dominant in terms of sheer volume because there are so many more properties in the U.S. office sector. But more recently, I would say 2014 and the first part of 2015, we have seen apartments actually take the lead in part because investors have recognized that shifting demographics, an improving economy, as well as household formation, have driven demand for this particular product. In the long-run, I expect office to remain sort of the leader. When you look across leasing and investments, apartments obviously provide a dominant position in the landscape.

Do you think apartment building will continue to dominate new-home construction?

The short answer is yes. The multifamily sector still has a lot of steam and growth. If you look at nothing more than household formation all the way back to 1958, we basically get about 1.3 million new households per year. Between 2008 and 2013, that average was 575,000. So, we are talking less than half. In essence, we are having some catch up to do to that artificially suppressed household formation, which was due to the recession. Demand for housing will continue to remain strong. When we look at affordability issues, [and] at the pace of new home [construction] being so low, the clear alternative to that is the multifamily space. We think that the demand for multifamily will continue quite strongly. Investors [and] developers are recognizing that fact, and certainly making a play on it.

How fragmented is this market? With the office market, it is a completely different story on the coasts than much of the interior. Is it the same with multifamily? 

To a large extent, yes. The main driver of that is population growth and economic growth. When you look at the different regions of the country, it is obvious that in terms of employment and population growth, it is urban centers and coastal markets. The lowest vacancies for multifamily are on the coast. We are based in [Washington], D.C. Construction of multifamily has been quite strong [for] the last two years. It is shifting toward this urban, walkable, mixed-use community environment, which seem to be favored both by millennials and more affluent boomers. Developers are obviously feeding on those changes.

Where do millennials factor into this cycle? 

We are seeing the first wave of millennials enter the employment market, start making decisions about forming new houses.  At the same time, the broader demographic trends point to the fact that millennials are not in a hurry to enter the traditional housing track. So, in that regard, the rental market is going to be quiet viable and quite strong on that account alone.

Given that millions of households will form in the next 15 years and the homeownership rate is declining – implying that more people are choosing to rent – could multifamily avoid a down cycle and continue strong for years to come? 

That would make it a very strong statement, to be a-cyclical in a sense. I still believe that the real estate cycle with continue to characterize multifamily as it has for decades. A lot of this is due to macroeconomic cycles, as well as capital cycles, the cost of capital, interest rates and so on. Where we find ourselves right now is in a low interest-rate environment, which clearly favors financing for these type of multifamily buildings. In addition, we are in a phase where demand is strong. In my opinion, the cyclical component of multifamily will still be present. The cycle may be slightly longer simply because of the unusual nature of the recession and the post-recession environment. If you want to use a baseball analogy, most analysts say we are in the fourth or fifth inning. When you look at the differing markets, a New York or San Francisco, [Washington] D.C., these markets were obviously quick to enter the doldrums, but they were quick to rebound. When I look at smaller markets, secondary and tertiary markets, they were much slower to enter the recession. Their markets were slower to [experience a] downturn, but  they have taken a lot longer on the rebound. For those markets, we may not be quite in the mid-point of a game, but maybe a little bit earlier. So, in that regard, I think the multifamily market will likely benefit from a slightly longer upswing in this cycle. Will it go on forever? I don’t think so. Eventually the building frenzy will catch up with demand.


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