Multifamily Investment Remains Hot In Spite of Financing Challenges, Looming Supply

Posted on August 3, 2012

Apartment landlords and investors continue to benefit from strong demand as the multifamily shifts from recovery into growth and development mode, according to a pair of new surveys of CRE executives and investors.

For the sixth quarter in a row, the National Multi Housing Council (NMHC) Quarterly Survey of Apartment Market Conditions showed improvement across all four indexes measuring supply and demand and financing for multifamily properties.

“The apartment sector’s strength continues unabated,” said NMHC Chief Economist Mark Obrinsky. “Even as new construction ramps up, higher demand for apartment residences still outstrips new supply with no letup in sight.”

Despite the demand for new apartments, acquisition and construction finance remains constrained in all but the best properties in the top markets, however, according to the NMHC second-quarter survey. The survey of 82 CEOs and other senior executives of apartment-related firms nationwide, conducted between July 16 and July, is considered a very timely snapshot of multifamily industry sentiment.

The survey’s indexes measuring market tightness (76), sales volume (54), equity financing (58) and debt financing (77) all measured at 50 or higher, indicating growth from the previous quarter.

Editor’s Note: For an in-depth look at multifamily at mid-year 2012, CoStar subscribers may sign up for the CoStar State of U.S. Multifamily Market Mid-Year 2012 Review and Outlook under the Knowledge Center tab. The webcast presentation is Tuesday, Aug. 7, at 12 noon EDT.

Despite the capital markets barriers, just over half the CRE executives queried in the 2012 KPMG Commercial Real Estate Outlook Survey said they expect a significant amount of multifamily development to begin in 2013 — by far the top sector, and up from 34 % in KPMG’s 2011 survey. Industrial development was a distant second among property sectors at 14%.

Executives in the KPMG survey said the wider commercial property industry continues to face growth challenges, with nearly one-quarter, 24%, citing access to and managing capital as a barrier. Others cited pricing pressure (35%), lack of demand (25%) and regulatory and legislative pressures (21%) as barriers to growth.

“Commercial real estate execs are finding it challenging to source sufficient product that will produce the necessary yields to meet investor expectations. The gap between ask and bid price can still be significant in certain markets,” said Greg Williams, national leader of KPMG LLP’s Building, Construction and Real Estate practice. “It’s also taking a lot longer to raise capital needed to grow their portfolios, while increased regulatory reporting requirements are driving up costs.”

The NMHC survey found that financing is available, but only for the best markets. Nearly two-thirds reported that acquisition capital is readily available and 52 % said construction capital was only available in top-tier markets. Only 16% of reported that acquisition capital and just 10% said construction financing was readily available across all markets at all times.

All that being said, lending volume for multifamily properties rose 19% in the second quarter compared to the same period a year ago and 21% from the first quarter, according to the newly released Mortgage Bankers Association’s (MBA) Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations. The year-over-year increase in apartment mortgages ranked behind hotels and retail, but ahead of office and health-care property originations.

For the first time in a year, more than half, 55%, of respondents said that apartment markets were tighter, while only 2% reported the markets as loosening. The other 43% reported no change over the past three months.

The council’s sales volume index dipped slightly to 54 from 57, with nearly one quarter of respondents reporting increased sales, compared to 16% who indicated lower volume and 55% who reported conditions as unchanged.

The availability of equity financing for apartments continued three years of growth, though it shrank to 58 from 62 from the previous quarter.

Meanwhile, the debt financing index jumped to 77 from 65, with only 2% reporting borrowing conditions as being worse from the previous quarter. For six consecutive quarters, the share of survey respondent who believe the availability and terms of debt financing had worsened was in the single digits.

By Randyll Drummer, Costar Group