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Come to the Revival

Early last year when the labor market was shedding several hundred thousand jobs per month, multifamily was in the crosshairs of the unfolding housing crisis. Lost jobs plus burgeoning shadow supply (unsold condos and foreclosed houses being offered for rent) meant that demand and supply were heading in opposite directions. Today the multifamily market is recovering at a brisk pace. How did the turnaround happen?

·         The labor market is growing, albeit slowly. Private employers added 863,000 payroll jobs year-to-date through September even as governments eliminated 250,000.

·         As jobs become more plentiful, households are “unbundling.” Recent graduates who moved in with parents or friends are finding jobs and leasing apartments.

·         Though mortgage rates are at historic lows, it is harder to qualify for a loan than it was during the boom because lenders are more carefully scrutinizing borrower credit.

·         Renters feel no urgency to become homeowners. Prices are flat or still declining in most markets with the exception of coastal California according to the S&P/Case-Shiller Home Price Indexes. It could be awhile before homeownership is once again viewed as an avenue to long-term wealth creation.

·         Foreclosures continue to mount, but the crisis seems to be adding renters faster than potential new rental units. Most foreclosed homeowners become renters right away or soon after they move, whereas their former homes can remain in limbo for awhile before they are sold, and only a fraction of them will become rental units.

·         Many of the unsold or foreclosed units that enter the rental market are not directly competitive with professionally managed apartment communities with amenities, 24-hour maintenance and other features.

·         As a result, the multifamily vacancy rate fell to 7.1 percent in the third quarter from 7.8 percent in the second quarter according to Reis. This is among the sharpest drops in the history of the Reis database.

·         Long-term demographic trends favor the multifamily market. The 20-34 age cohort – prime renting years – will grow by 4.3 million in the current decade. These are the baby boomers’ kids, and they will fuel demand for apartments over the next few years.

·         New construction is at a minimum, and favorable financing is available for investment properties through Fannie Mae and Freddie Mac.

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