Industry Downplays Fears of Multifamily Bubble
Byline: Kevin Wack
Construction of new apartment units is climbing at a rapid clip. Nationwide prices for multifamily housing are rising back toward their pre-crisis peaks. Meanwhile, the market is getting a boost from low interest rates that no one considers sustainable over the long term.
To some, these factors suggest that a bubble is forming in the multifamily market and that, a few years from now, developers will be sitting on so many empty apartments that they will be unable to pay their bank loans.
But others who follow the rental housing market closely argue that worries about a multifamily bubble are overblown. They described some reasons for concern, but they also expressed a belief that the supply of rental units is in balance with market demand, except perhaps in a few geographic areas.
"With unemployment rates still high, we are only starting to see household growth rebound from very suppressed levels," Eric Belsky, managing director of the Joint Center for Housing Studies at Harvard University, said in an email. "Many [newcomers to the market] will rent first and, given that so many are young, single adults, multifamily housing will get an extra lift."
"I think overall our take is that it doesn't appear to be an outright bubble at the moment, but it could be in individual markets," added Matthew Anderson, an analyst and commercial real estate expert at Trepp LLC.
There is no doubt that the current demand for rental housing is strong, with multifamily vacancy rates around 5%, their lowest level in a decade. One key question today is whether that strong demand is sustainable.
Questions have also been raised about a potential oversupply of apartment units. A recent op-ed in American Banker, which raised concerns about a potential bubble in multifamily lending, noted that multifamily starts rose by 54% from 2010 to 2011, and by an additional 36% in the first quarter of this year, suggesting that some markets are in danger of becoming overbuilt.
What the op-ed did not say was that multifamily construction fell off a cliff in 2009. And even following last year's solid increase, rental housing starts remain far below their pre-recession level, in part because of constraints on the availability of credit.
Among industry participants, perhaps the biggest cause for concern involves the Fed's low interest-rate policy. With rates depressed over the last several years, some real estate investors have bought buildings that are providing fairly narrow returns. When interest rates eventually rise, and higher-yielding investments are available, the value of those properties should drop.
"So the question is when will that happen, and will that create another debacle in the apartment market?" asked Ronald Johnsey, president of Axiometrics Inc., an apartment market research firm.
Patrick Simons of Strategic Property Economics agreed that ratios between an apartment building's annual revenue and its market value are currently at a low level, in part because of low interest rates, and said those ratios have led to higher property values.
"But don't get complacent a these levels are not the historical norm," Simons warned clients in a recent newsletter.
There is currently $849 billion in multifamily mortgage debt outstanding in the United States a or about one-twelfth the level of debt outstanding on single-family homes, according to the latest data from the Federal Reserve Board.
While a bubble in the multifamily sector would not pose the threat to the U.S. economy that last decade's housing bubble did, it could threaten the balance sheets of banks that specialize in multifamily loans. Several banks in urban areas have significant exposure to multifamily real estate.
As of the third quarter of 2012, U.S. banks had $227.8 billion in multifamily loans outstanding, up 4% from the fourth quarter of last year, according to data from the Federal Deposit Insurance Corp. …