Multifamily Market Musings: a Conversation with Fannie Mae’s Kim Betancourt
Kim Betancourt is Fannie Mae’s Senior Director of Economics and Multifamily Research. She manages a team of real estate economists that focus exclusively on the multifamily sector. They analyze current economic conditions at both the national and local level, determining their impact on the multifamily sector and identifying future trends.
Before joining Fannie Mae, Betancourt was a Senior Vice President at GMAC Institutional Advisors and managed the Realpoint (now Morningstar Ratings) senior analytical research team. Prior to GMAC, she was a Director in the Structured Finance department of Standard & Poor’s and managed a team of 10 senior analysts. She has also held leadership positions with Citicorp and Midlantic National Bank (now PNC). She is a member of the Counselors of Real Estate.
MBA NEWSLINK: What are the big picture themes in the multifamily market that you are analyzing as we head into the fourth quarter?
KIM BETANCOURT: Late last year and through the first half of this year there has been a significant turnaround in the multifamily market. Demand has increased rapidly and this has led to rent growth and gains in occupancy levels. Fannie Mae’s Economic and Strategic Research group expects demand for multifamily rental housing to be supported by a mix of demographics, ongoing job growth and a nationwide shortage of housing. At the same time, demand has been supported by federal stimulus payments and the reopening of local economies. This combination of factors is expected to support multifamily over the short term and long term.
We believe that the national multifamily vacancy rate will decline in 2021, but not as much as the current trajectory might suggest. That’s because new completions are expected to outpace demand, at least over the next 12 to 24 months. While we expect continued demand for multifamily rentals, newly delivered supply is expected to remain elevated throughout the year, keeping estimated vacancy levels relatively stable. We anticipate that the U.S. national multifamily vacancy rate likely will be within an estimated range of between 5.25 percent and 5.75 percent by year-end 2021.
Rent growth was positive in the first half of 2021 after remaining negative during most of 2020, with much of the current momentum taking place during second quarter 2021. We estimate that rent growth surged in second quarter 2021 by at least 3.0 percent for the quarter alone, but we do not believe this elevated pace is sustainable. We believe that this unusually large increase is due to pent-up demand. While rent growth likely will moderate over the second half of the year, annualized rent growth for 2021 could still come in at an above average peak of 5.0 percent.
NEWSLINK: What does your research show in terms of affordability challenges?
BETANCOURT: Even prior to the pandemic, lower-income renters struggled to pay rent. Typical Class C rent payments for units offering the most affordable rents have tended to trail rent collections of Class A and B units by between 5 and 6 percent. For example, between April and December of 2019 the share of rent payments made by Class C renters was estimated to be at 89.4 percent, compared to about 94.7 percent for Class A units and 95.5 percent for Class B units, according to RealPage.
With eroding affordability stemming from recent rent growth trends and the uncertainty of future demand trends in certain employment sectors such as lower-wage service and hospitality jobs there is concern that the lowest income renters may be further impacted over the coming months. There is some evidence that Class C renters are struggling more than usual.
For example, the share of Class C rent payments made from June 1through June 27 of this year fell by 1.7 percentage points compared to the same period in 2020. So, 87.5 percent of all Class C renters made payments in June, down from 89.2 percent in June 2020.
According to the Census Bureau’s Household Pulse Survey from June 7, 2021, an estimated 7.1 million renters, including those in multifamily and single-family homes, were behind on their rent payments and 1.2 million renters were concerned that they would be evicted within the next 60 days. Even more sobering, although emergency rental assistance is in place, through the end of May only an estimated 350,000 renter households have received any emergency rental assistance, according to a recent report issued by the U.S. Department of Treasury.
However, recent increases in job growth help support our more optimistic outlook for the affordable multifamily sector. As more people get back to work, and with wage growth also increasing, we believe that many renters behind on their rent payments will be in a better position to enter a rent repayment plan. We do expect some volatility in net absorption over the latter part of the year because we are expecting a fair amount of tenant movement to occur. Additionally, with more than 500,000 units of new supply expected to enter the market in 2021, we believe there will be additional pressure on future rent growth–and concessions–in some of the nation’s largest metros.
NEWSLINK: ESG–Environmental, social and governance criteria–seems to be on everyone’s minds in the commercial real estate and multifamily industry. How are you viewing developments in this space and Fannie Mae’s ability to play a leadership role?
BETANCOURT: Just over a decade ago, we pioneered a green finance program that enables building owners to make improvements in older multifamily homes. Borrowers are able to refinance mortgages and use some proceeds to make improvements on homes such as replacing existing fixtures with low-flow showers and toilets as well as more energy-efficient lighting fixtures. Last year, we did $13 billion worth of multifamily green financing and from 2012 through 2020 we issued nearly $88 billion in multifamily green mortgage-backed securities, making us the largest green bond issuer worldwide. Earlier this year we issued our first social bond pooling multifamily debt backed by loans on multifamily properties that preserve or create affordable rental housing. ESG has become a priority for many participants in the industry because improving energy efficiency and cutting water use helps with affordability and improves a building owner’s multifamily asset.
As a part of our broader corporate strategy, Fannie Mae is committed to tying our business activities to measurable and positive environmental, social and governance outcomes. We know, for example, that supporting a market that rewards energy- and water-efficient residential development and operations has the power to create well-paying jobs and utility cost savings for families. Through 2020, we are proud to have realized an estimated $146 million in tenant utility cost savings for families and $9.5 billion in wages paid to construct or retrofit properties as a result of our Green Bond issuances.
NEWSLINK: Which multifamily markets are seeing improved fundamentals and which are still lagging?
BETANCOURT: Major metropolitan areas are seeing an improvement in fundamentals, especially over the past six months. It’s actually more a question of how quickly we will see any notable turnaround in some of the nation’s larger, more expensive, coastal metros such as San Francisco and New York. Those metros are definitely seeing improvement, but they are still making up lost ground from the pandemic. In contrast, there are many metros–both urban and suburban locations–that are seeing ongoing demand. For example, suburban locations in Atlanta, Phoenix, Sacramento, Jacksonville, Richmond and Las Vegas all experienced annualized rent growth of more than 8% as of first quarter of this year.
Urban locations in Sacramento, Tucson, Tampa and California’s Inland Empire have experienced rent growth of more than 6% over that same time frame. In contrast, many of the nation’s larger multifamily metros, such as New York, Los Angeles, Boston and Washington DC, saw a decline in rents of at least 2% or more, mostly in urban locations. You have also seen a drop in rents in suburban locations of San Francisco, San Jose and Oakland. That said, we believe a rising tide and an improving outlook will support the multifamily sector for the rest of 2021, and into 2022, across the nation’s major metropolitan areas. Our outlook is based on positive demographic trends, better economic conditions, expected job growth and rising wages.
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