Freddie Mac: ‘Seasonal Slowdown’ for Multifamily

The multifamily sector saw a “typical seasonal slowdown” in the fourth quarter, reported Freddie Mac, McLean, Va.

The Freddie Mac Multifamily Apartment Investment Market Index combines rental income growth, property price growth and mortgage rates to measure multifamily market investment conditions. A higher index reading from one quarter to the next implies a better environment for multifamily investment; a decline suggests that attractive investment opportunities are becoming harder to find.

For the fourth quarter, AIMI captured the market’s typical seasonal slowdown, with quarterly declines nationally and in all 14 major metropolitan markets, said Freddie Mac Multifamily Vice President of Research and Modeling Steve Guggenmos.

Guggenmos noted that rent growth seasonality typically leads to lower fourth-quarter income compared to the third quarter. “AIMI’s declines this quarter are consistent with the normal seasonality of rent growth at the end of the year as well as property income growth slowing with new supply,” he said. “However, the overall fundamentals of the market remain strong and the moderation we are seeing continues to be within our expectations for the market moving forward.”

Guggenmos said multifamily properties in most markets continue to experience steadily rising rents triggered by “unprecedented” rental housing demand and gaps in housing production.

On an annual basis, the AIMI increased in eight markets and remained essentially flat in Los Angeles and Seattle as well as nationally, Freddie Mac reported. Local markets experiencing the biggest annual index gains included Washington, D.C. (14 percent), Atlanta (4.7 percent) and Houston (4.2 percent).

The annual index declined in four markets: New York, San Francisco, Philadelphia and Phoenix, Freddie Mac said. “The annual declines were largely due to property price growth outpacing net income growth and mortgage rates dropping below where they were a year ago despite higher interest rates,” the report said. “The index does not fully take into account the impact of fourth-quarter interest rate increases on the multifamily market, largely due to their timing and the lag in their impact on mortgage rates.”

In a separate report Freddie Mac said its multifamily origination volume could increase by three to six percent this year and even top $295 billion in 2017 depending on movements in the 10-Year Treasury rate.

The Freddie Mac Multifamily Pricing and Volume Outlook said the GSE’s multifamily volume could grow to $295 billion or more if the 10-Year Treasury rate stays in the 2.5 percent range. While final numbers for 2016 volume are not yet in, this would equate to six percent growth from Freddie Mac’s estimated $280 billion mortgage origination volume last year.

But Freddie Mac multifamily volume growth could slow to 3 percent if the average 10-Year Treasury rate rises more abruptly, the agency noted. It predicted that total origination volume would continue to grow even in the higher-rate scenario because of the accompanying higher inflation and wage growth as well as recent price appreciation.

“The multifamily market is poised for growth and record origination volumes in 2017 under either interest rate scenario,” Guggenmos said. “This fact underscores the underlying strength of the multifamily sector thanks to a strong labor market, demand from new households and steady absorption rates.

Guggenmos said a “moderate” interest-rate increase alone would not cause any significant disruption to the multifamily investment market.