Sam Chandan

In addressing attendees at Arbor’s annual Winter Sales Meeting, Sam Chandan, PhD, Chief Economist for Reis, Inc., stated that while the credit markets are not as optimistic as the equity side, the coming year is an opportunity for those in the industry to educate investors.

 “They need to understand the real difference between residential and commercial real estate,” Chandan explains. “Further, they need to understand the differences within commercial real estate.”

Indeed, as consumers hesitate to purchase homes, demand for apartments is firming across the country, according to Chandan. However, in certain areas, namely the Sunbelt markets, competitive pressures from the eroding condominium market will have an impact on multifamily. In addition, the availability of substitutes and increasing development activity will erode occupancy levels in a number of markets.

Conduit business should begin to stabilize next year, according to Chandan. If you look over the past decade, growth in CMBS looks good. “From a historical perspective, however, 10 years may not be enough time to get a true indication of how a market is doing,” Chandan warns.

Key sources of risk to watch out for over the coming weeks include:

·          The housing market

·          Consumer confidence

·          Business investment, hiring patterns and profitability

·          Borrowing costs

·          Commodity prices (including oil) – “OPEC is not increasing production, so we may be seeing $4 a gallon of gas in March or April,” says Chandan.

·          Currency markets

·          Policy intervention – “For example, the Fed is asking lenders to extend their teaser rates for the next year,” he adds.

·          Geopolitical developments

Overall, the economic expansion remains imperiled, according to Chandan. Credit markets will remain restrained during a protracted period of adjustment, and financial market volatility will persist, absent consensus with regard to the outlook for the economy and in light of significant downside risks.

While asset prices and mortgage performance within the housing market will continue to decline, multifamily and commercial real estate fundamentals remain relatively healthy.

Sam Chandan, PhD, is the Chief Economist of Reis, Inc. He can be reached at chief.economist@reis.com.


Multifamily Market Trends in Q3 2007

Apartment vacancy rates varied in the third quarter of 2007. The U.S. Census Bureau reported a .3 percent rise from the previous quarter in the vacancy rate for all rental apartments (buildings with 5 or more units) to 10.4 percent, while the M/PF YieldStar national vacancy rate for investment-grade apartments fell .5 percent to 4.4 percent. The M/PF YieldStar vacancy rates fell in all four regions of the country to 3.1 percent in the Northeast; 3.7 percent in the West; 5.7 percent in the South; and 4.4 percent in the Midwest, the region’s second lowest reading in the last six years.

While multifamily permits declined, multifamily starts and completions increased in the third quarter. Permits declined 6.2 percent from the previous quarter and 10.3 percent from a year ago to a seasonally adjusted annual rate (SAAR) of 331,000, the lowest level in three-and-a-half years. Starts increased by 4.3 percent from the second quarter and 5.2 percent from a year ago, to a SAAR of 274,300. Despite the increase, the rate of starts is still nearly 10 percent below the average level of starts in the first six years of this decade. Completions increased by 16.6 percent from the second quarter to a SAAR of 257,700, a decrease of 2.4 percent from last year’s measure.

For the second quarter in a row, multifamily net absorptions outpaced multifamily completions, contributing to the increase in occupancy rates in the apartment industry.  Absorption rates for the second and third quarter have been the strongest consecutive absorptions in more than six years, as multifamily net absorptions of investment-grade apartments tracked by REIS doubled from a year ago in the third quarter to 39,759. Multifamily completions in the investment-grade market increased to 23,798, an increase of 7,760 from the previous quarter and of 3,210 from a year ago.

Apartment rents rose in the third quarter. The West had the strongest rental growth (4.8 percent) while the South had the weakest (1.7 percent), according to the portfolio of apartments tracked by M/PF YieldStar. The CPI Index, which covers all rental housing, increased by 4.1 percent from last year. This is the fourth consecutive quarter in which year-over-year rent growth has been greater than 4 percent.

Transaction volume recovered in the apartment investment market as third quarter volume increased 7.4 percent from the second quarter to $20.3 billion, a figure that is relatively unchanged from last year’s volume. Apartment price appreciation remained strong as the average price for properties sold in the second quarter of 2007 was $107,434 per apartment unit, up by 7.6 percent for the quarter and by 14.4 percent from a year ago.

The average cap rate was 6.1 percent in the third quarter, almost the same as the second quarter.

Source: The National Multi Housing Council, www.nmhc.org


Senate FHA Bill To Help Ease Subprime Crisis

The National Association of Home builders (NAHB) reported that the Senate approved legislation that would improve the capacity and flexibility of the FHA to serve the credit needs of subprime and other challenged mortgage borrowers. The bill passed by an overwhelming 93-to-1 margin.

This legislation will help to alleviate the current housing downswing and allow the Federal Housing Administration to insure mortgages for more home owners.

“The nation’s home builders applaud the Senate action to modernize the FHA to allow the agency to carry out its mission to spur housing opportunities for America’s working families,” said Brian Catalde, president of the National Association of Home Builders (NAHB) and a home builder from El Segundo, Calif. “The measure would offer borrowers a safe and fair mortgage alternative to the volatile subprime market. We urge the House and Senate to move quickly to iron out differences between their bills and bring this legislation to the President’s desk before year-end.”

Faced with a severe deterioration in the availability and affordability of housing credit during a period when FHA’s programs have failed to keep pace with procedural and technological advances in conventional mortgage loan programs, S. 2338, the FHA Modernization Act of 2007, would enable the FHA to respond to the needs of borrowers and play an important role in stabilizing the mortgage markets.

Specifically, the FHA Modernization Act of 2007 would:

·          Increase the current limit for FHA-insured mortgages to enable deserving potential buyers to purchase homes in more markets across the country.

·          Grant the FHA authority to establish greater flexibility in setting down payment requirements for its single-family programs.

·          Simplify requirements for condominium loans, which are often burdensome and differ significantly from the rules applied to mortgage loans for detached single-family homes.

·          Allow the FHA to insure more “reverse mortgages” and increase the maximum loan amount for such transactions.

Source: The National Association of Home Builders (NAHB,  www.nahb.org.