Single-family market to recover first; multi-family to recover more slowly

From the National Association of Home Builders -- With the children of parents born during the post-World War II baby boom nearing a time when they will form households and rent apartments in large numbers, the nation’s multifamily housing industry is looking forward to a glowing future. In the meantime, however, times have grown exceedingly tough for the multifamily sector, which declined sharply following last fall’s meltdown in the credit markets and is weakening further as the nation’s economic recession and job losses intensify.

Industry leaders and housing economists participating in NAHB Multifamily’s Pillars of the Industry Conference in San Diego on March 17-18 noted that the production of multifamily housing has plummeted and said that it will take some time before the marketplace returns to normal.

NAHB Chief Economist David Crowe voiced optimism that the single-family market is nearing a bottom, largely as the result of the massive economic stimulus package enacted last month. Home sales, he said, are expected to bottom out in the current quarter and starts should show “some recovery” in the second half of the year. However, he noted, the improvement won’t be “robust” because of the large overhang of vacant homes on the market.

“The multifamily side will not be as quick to recover,” Crowe said, with the credit and equity needed to start new developments “hard to get” and the industry facing stiff competition from unsold housing that is being rented out until better times arrive. “A lot of your customers are people who have lost jobs,” he added.

Multifamily production will hit a trough of roughly 105,000 rental units annually in the third or fourth quarters, he forecasted, and about 60% of what is started will be housing financed with low-income housing tax credits. Activity, however, “will pick up in 2010 as the overall economy is revitalized,” he said.

A Silver Lining

Economist Ron Witten, president of Witten Advisors, was even gloomier in his short-term projections for multifamily rentals, which he predicted will fall below 100,000 this year, a record low, and head toward the 90,000 level in the year’s final three months.

“There is a silver lining,” Witten said. Once the recession passes and jobs come back, in about 2011, “there will be more apartments rented than ever before” and net demand could surge by 500,000 units.

The rents that multifamily developers will be charging this year will fall an average 5%, he said, and there will be some further decline in 2010 before rent growth rebounds at a rapid 7% pace in 2011.

“Seven percent sounds great,” Witten said, “but it’s really money you thought you already had.”

The rental market lost a record 120,000 residents in the fourth quarter of last year, he said, and the deep job losses expected in 2009 — at an average monthly pace of 400,000 and bottoming out in the third quarter — will further undermine housing demand.

About 4.3 million jobs have been lost in the past 12 months, Witten said, more than in any previous post-war recession, and a total of seven million jobs will be lost by the time the downturn ends. When the recovery gains steam in 2011, he said he expected the economy to produce “a couple of million jobs,” which would be far shy of replacing all of those that had been lost.

“It will take a while to recover from this deep trough,” he said. “This recession is so deep and housing so competitive” that none of the 42 major markets he tracks will have 3% rent growth this year. “The broad trend suggests some real short-term challenges,” he said.

State of the Industry

The CEOs of the industry’s leading multifamily companies and a CEO of one of the nation’s largest single-family companies led a conference discussion of the state of the multifamily industry, and overall they indicated that they are holding on as best they can by finishing projects that were already in the pipeline, managing assets, improving their net operating income, finding the liquidity they need to ride out hard times, downsizing and preparing for the abundant opportunities that are expected to materialize during the recovery.