Multifamily Originations, Rent Growth Moderating

Multifamily origination volumes could increase 7 percent year-over-year to set a record in 2016: $280 billion, reported Freddie Mac’s Multifamily Research Group, McLean, Va.

But origination growth is moderating compared to the same period in 2015, when volumes rose by 35 percent, said Freddie Mac Multifamily Vice President of Research and Modeling Steve Guggenmos. 

“We entered a period of positive moderation during the first half of 2016 that is natural at this point in the economic cycle,” Guggenmos said. “Rather than indicating overproduction, current and projected supply levels show a measured response to market changes and demand from Millennials and other groups with high propensities to rent.” 

Guggenmos said he expects the multifamily sector to continue to grow at above pre-recession levels, “although market differences will continue to vary.”

Yardi Matrix, Santa Barbara, Calif., reported that multifamily’s recent robust growth run is beginning to decelerate. Average U.S. rents increased 5.5 percent year-over-year, down 10 basis points from June, 60 basis points from April and 120 basis points from the recent peak last October. 

“July’s numbers show that the big picture about the multifamily market continues to be positive,” said Yardi Matrix Vice President Jeff Adler in the firm’s monthly report. “Rent growth of 5.5 percent is a very solid foundation, and the vast majority of metros across the country are seeing healthy rent growth by historical standards.” He said demand remains strong, driven by consistent job growth, rising household formations and the ongoing dip in homeownership. As a result, occupancy rates of stabilized properties stand at 96 percent overall and remain virtually unchanged in recent months despite the uptick of supply in many metros.

“That said, there are a number of signs that gains will moderate going forward,” Adler said. “One is seasonal: In recent years, rent increases slowed significantly in the second half of the year.” He noted that rents are up 4.6 percent year-to-date, already topping most full-year expectations, so the same pattern seems likely again in 2016. 

In addition, some metros show the effect of new supply or have bumped up against the limits of affordability, Adler noted. “We expect more than 300,000 new units to be delivered in 2016, the most of any year during the current cycle,” he said. “Meanwhile, deliveries are tilted toward the high end of the multifamily universe, which is having the biggest impact in the more expensive metros. In particular, rent growth has slowed in technology- and energy-led metros San Francisco, Denver, Austin and Houston due to some combination of the above factors.”

Guggenmos noted that multifamily property prices rose in the first quarter at a slower rate than in prior years, but said gross income growth should remain near its historical average for the rest of the year.