Nevertheless, multifamily investors face a liquidity squeeze and exaggerated repricing of risk. The cycle of increased liquidity began in the aftermath of the dot-com bust and the 9/11 attacks. The availability of low-cost capital propped up the global economy, increasing investment activity and fueling price appreciation, particularly in housing. Global liquidity and the need for higher yields produced a higher tolerance for risk among investors, which eventually required realignment.

In addition, in the past 20 years, the concentration of balance-sheet debt held by banks has been reduced substantially through the securitization of mortgages. Loans are placed into pools and sold as CMBS to investors. This distribution of risk has been a positive force for the financial system. However, it has also obscured the identity and exposure of investors, particularly in subprime mortgages. This uncertainty caused investors to pull out of the CMBS market, as several funds announced problems with subprime mortgage holdings, and concerns spilled over to commercial securities.

Today's lending market has tightened substantially compared to the cycle of increased liquidity between 2001 and 2006. In the near term, this lending environment--coupled with higher mortgage rates and moderate job growth--will push demand upward for apartment units. Furthermore, more stringent underwriting requirements will make it difficult for developers to move forward with some planned projects, further supporting space fundamentals. As ARMs adjust and mortgage payments become unaffordable, many homeowners will return to the rental market. Foreclosure sales are up 90% this year and are forecast to climb. By some estimates, 2.2 million loans originated in recent years will end in foreclosure.

Competition for renters has increased in markets where condo/single-family investors were most active, but new apartment development remains moderate and vacancy will remain in a healthy range. New supply is forecast to total 92,000 units by year's end, up from 2006 but still well below the average from 1999 to 2004 of 152,000 units. In the near term, a growing supply of vacant homes and the return of conversion projects to the rental market will put some upward pressure on vacancy, though the net effect of the conversion trend will remain a positive for apartments.

Longer term, immigration and demographic trends support a favorable outlook for apartments. Immigration is forecast to average 1.2 million annually through 2015. In the same period, baby boomers' children will enter their prime renting years, with the 20- to 34-year old population expected to grow by 4.8 million. Effective apartment rents are up 4.6% from last year and have increased 13% since bottoming in 2003. Rent growth of 4% is expected in 2007 and 2008.

Turning to the investment sales market, the number of deals falling out of contract spiked in late summer, but the dollar volume of deals under contract also increased. This suggests that many closings have been delayed and not cancelled. Some risk premium is returning to real estate, with cap rates expected to rise by an average of 20 to 50 basis points over the next several months. While increased borrowing costs and limited price appreciation will put upward pressure on cap rates across the market, a dramatic correction is not expected. Lenders have become more selective, showing a strong preference toward historically tight markets and top-quality properties that can show current strong occupancy and rent growth.

Because of healthy supply and demand fundamentals, low levels of commercial mortgage delinquency and increased renter demand by displaced homeowners, the national apartment market is expected to remain solid moving into 2008. Conduit lender spreads have come down from recent highs, which combined with lower US Treasury yields, have brought all-in borrowing costs closer in line with mid-July levels. Since early August, banks, life insurers, Fannie Mae and Freddie Mac have also stepped up activity, regaining market share lost to CMBS in recent years. Commercial mortgage underwriting requirements have tightened, and while they may ease modestly by year's end, a return to previous norms is unlikely. With no evidence of major trouble ahead for the commercial mortgage market, continued support from the Fed and more stringent lending standards, expect increased liquidity in the CMBS market and continued healthy apartment market fundamentals.

The views expressed in this article are those of the author and not Real Estate Media or its publications.

Linwood Thompson is the senior vice president and managing director of Marcus & Millichap Real Estate Investment Services' national multi housing group.Our print, online & conference informational network provides the finest industry coverage in the businessPrintOnlineConferences

Instant Insights /

Insight: Long-Term Strength Will Outweigh Current Capital Market Concerns

Related Stories

Recommended For You