FEATURE ARTICLE, NOVEMBER 2007

SUBPRIME WOES: MULTIFAMILY'S GAIN?
Multifamily real estate stands to benefit from the residential subprime mortgage situation.
Robert S. Aisner

With all of the analysis by experts on the subprime situation, one can surmise that many residential real estate owners are finding themselves in a rather precarious position. But while it will take time to realize the full effects from the mortgage meltdown, there is a silver lining to the proverbial cloud: Multifamily demand remains robust, despite the shaky residential market, and it’s expected to stay that way.

According to a survey released August 2, 2007, by the National Multi Housing Council (NMHC), the multifamily market is going strong. The NMHC says, as of first quarter 2007, there was actually a decrease in the number of renters leaving their apartments in order to buy homes. In its report “Quarterly Survey of Apartment Market Conditions,” NMHC found that “the continued strong demand conditions suggest that any supply spillover from the excess inventory in the for-sale market into the rental market has not exceeded the growing demand for apartment residences.”

The quarterly survey, which was conducted the week of July 23 to July 30, 2007, polled 80 CEOs and other senior executives of apartment-related firms. Here are the other findings from the NMHC survey, as outlined in the council’s news release:

• 59 percent of respondents reported no change in occupancy rates or rental rates for first quarter 2007.

• The Market Tightness Index was basically unchanged from January (54) and April (56). A rating exceeding 50 means conditions are improving and a reading of 50 means that the conditions remain stable. According to NMHC, the second quarter of the year marks the 16th consecutive quarter the index has inched past 50, evidence that there is increased demand for apartments.

• Equity financing was seen as “unchanged” according to two-thirds of survey respondents, while 9 percent cited that they think there is more equity today than 3 months ago. This fact, says the news release, is “a sign that equity capital for investment in apartments remains easily available.”

Every Action Has a Reaction

Historically, the multifamily market has been robust, particularly among households needing the flexible solutions that renting offers. Business columnist Holman Jenkins, Jr., in a recent Wall Street Journal opinion piece, cited a study conducted in 2004 that found of the low-income people owing homes between 1977 and 1993, 36 percent returned to renting after 2 years and 53 percent rented after 5 years. The reasons for the return to renting had nothing to do with the subprime situation (it hadn’t taken place yet), but had everything to do with people wanting the opportunity to easily relocate for a new job and not have to worry about potentially losing equity should the owned home not appreciate in value, explains Jenkins.

The bottom line is this: While there are situations in which people are renting due to the residential mortgage meltdown, multifamily properties have long been a viable lifestyle choice. Furthermore, it’s a misconception to think that every person looks at home ownership as a “great social achievement,” says David Frum, a commentator for the American Public Media radio program called “Marketplace.” In a March broadcast, he offered this opinion: “If we’re going to subsidize saving and investment for lower-income people, does it really make sense to encourage them to save and invest in the least liquid and most risky possible way?”

The subprime situation is most definitely not tied to only the lower-income households — the middle class has been hit as well. Analyst Dr. Peter Linneman, professor of the Wharton School at the University of Pennsylvania, recently explained that because there has been such overbuild in the single-family market — including an abundance of homes priced over $400,000 — and because there is a wealth of existing homes for sale that aren’t moving, the short-term implication is that more people will be looking to rent residences in the next 18 months to 24 months.

Josh Scoville, director of strategic research for independent research firm Property Portfolio Research (PPR), echoes Linneman’s observation.

“Apartments, which are seen as a safe haven for capital during times of distress, should do fairly well as the choice to rent or buy really starts to favor renting,” he says, adding that PPR expects that apartment rental rates will be up about an average of 5 percent for second quarter 2007 in the major markets that PPR studies.

In conclusion, as the subprime situation creates dramatic ripples in the mortgage industry, the multifamily sector continues to function in a good light. As Mark Obrinsky, NMHC chief economist, says in the council’s news release: “Conditions remain generally favorable in the apartment markets, with demand for apartment residences continuing its gradual, but sustained, rise.”

Robert. S. Aisner is president and COO of Behringer Harvard.

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