Five Reasons Why Multifamily Occupancy is Sky High

by John Wilhoit Jr. on

Multifamily in the U.S. is experiencing its best occupancy  since 2002.  Why?  Is it our stellar industry personality? Better dressed leasing agents?  Shiny glass doors?  Nope.  Occupancy is high for the same reason gasoline goes up right before Labor Day… supply and demand.   There are a few other reasons, of course. Let’s explore them.

1. Mortgage squeeze. How many people do you know that have applied for mortgage financing?  How many obtained the loan they wanted?  As if refinancing were not difficult enough, new rules imposed by Fannie/Freddie have increased standards banks must meet to sell their originated loans to a GSE (Government Sponsored Entity).

While banks have the option of keeping a mortgage in house, standard operating procedure is to sell off each loan to the GSE’s so those mortgage funds can be loaned again. Alas, if a loan does not meet the requisites for an immediate sale then most lenders will decline the loan. Fewer loans, more renters… 

2. Lower home ownership rate.  Fewer home loans means fewer home owners.  We may be at the back end of this recession but we still have hundreds of thousand fewer families that own their own home today as compared to 2008. Fewer home owners, more renters…

3. Low wages for new wage earners.  With high unemployment wages remain stagnant.  For new college graduates, those in highly sought after fields are finding plenty of options.  But for others requiring immediate “re-training” the road to stable employment is longer. When wages remain flat people are less inclined to feel good about their future, i.e., less likely to make big commitments- like buying a house.  Not only are loans hard to come by, but if a family’s earned income is lower than five years ago this tends to dampen future expectations.   Low wages, low wage expectations equals more renters… 

4. Five years of “below trend” Construction starts.   New construction housing starts have hovered around 600,000 each year for  several years now.  Just to keep pace with nominal population growth and make up for homes (and apartments) that are removed from inventory, we need over 1,000,000 new homes built each year. Multiply this construction shortfall by five years and the gap begins to become obvious.  

I believe there are approximately 150,000 new homes available for sale as of this  writing.  That may seem like a big number, but not so when spread geographically and by price range.  Fewer new homes built equates to greater pressure on existing stock.  The new home housing stock is sparse! Fewer new homes available for sale, more renters…

5. Decrease in existing Housing inventory.  In summer 2011 Phoenix Arizona had a supply of more than twelve months of existing  homes available  for sale.  That  number is now around three months supply.  With limited new housing  product  coming on  line and foreclosure activity slowing the inventory is… not much.  Many market’s are seeing the swing from a buyer’s market to a seller’s market.  The cause is limited additions to supply, less mobility due to high unemployment and families staying in their home longer.  Fewer existing homes available for sale, more renters…

The real estate  cycle seldom stays in balance for long. We are  in a constant state of flux from over-supply to absorption to  equailibrium and expansion.  Seems that equilibrium is always the shortest of cycles.  I believe the pending housing shortage cycle will be longer than most people imagine.  It just  takes too much time to get new product  to market. 

Consider also that construction financing, while not a thing of the past, removes from consideration any but the most well heeled developers. Thus, over-shooting demand, this time, will be difficult to achieve as small developers are left on the sidelines without financing. 

 We may not see double digit rent  growth (other than in 24-hour cities) but 3%+ or greater will be the national norm for the next several years with consistently high occupancy.

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Multifamily Insight is dedicated to assisting current and future multifamily property owners, operators and investors in executing specific tasks that allow multifamily assets to operate at their highest level of efficiency. We discuss real world issues in multifamily property management and acquisitions. This blog is intended to be informational only and does not provide legal, financial or accounting advice. Seek professional counsel.  For more information, visit: http://www.MultifamilyInsight.com

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{ 3 comments… read them below or add one }

Phil September 5, 2012 at 10:02 am

I have to disagree with your claim of “below trend construction starts”. According to the national association of homebuilders construction starts have been on tear over the past year. From July 2011 – July 2012, housing starts had increased by over 20% on a national level and single family housing starts have increased by 17%. Housing starts are increasing at a faster rate than at any time during the pre recessionary years. Also, an indicator that housing starts will continue to rise is that the number of building permits issued over the past year has outpaced housing starts.

Multifamily occupancy rates may remain high for years to come as people continue to struggle to find work but don’t expect occupancy rates to edge much higher. With numerous multifamily projects in the pipeline, especially in core markets, it is possible the asset class could be a victim of over supply and thus increased vacancy rates.

John Wilhoit September 6, 2012 at 8:46 am

I think you validate my point, Phil… one year of gang-buster construction starts will not over-come five years of below trend construction starts. Granted, developers are want to shoot past the target, in terms of volume, but that will take a while- even if construction loans were easier to come by. In this credit market that process and the volume of loans is also slowed.

Charlie November 13, 2012 at 8:06 pm

I like the short term multi-family housing picture I think it looks better now than it did 5 years ago when I was looking to pick up a multi-family unit then.

I totally agree with your “mortgage squeeze” analysis. I seem to hear daily about somebody who cannot meet the new terms of a mortgage loan, or somebody who needs to down size to an apartment to save some cash.

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