Home Ownership, New Stock Squeeze MF Rental Growth

NEW YORK CITY-Widely considered bulletproof not long ago, multifamily rent growth now faces a couple of potential stumbling blocks. Namely, home ownership is back on an upward trend and new construction is putting pressure on existing properties, says Moody's Investors Service in a new report.

Among the major commercial sectors, “multifamily is the only one to which many tenants have a viable alternative: in this case, renting or owning a single-family home,” writes Tad Phillip, SVP and director of CMBS research at Moody's. Single-family is still “in the early stages of recovery,” with construction starts that are about one-third of the levels they reached before the recession.

“Conversely, the multifamily segment has matured to the point where rents and construction starts have returned to their approximate pre-crisis levels,” he writes. Apartment development has accelerated to the point of threatening to undermine existing properties' revenue streams.

Specifically, multifamily construction starts now average slightly less than 350,000 units per year, which is about the rate of starts leading up to the peak, Moody's says. By contrast, single-family starts are running at about one third to one half the levels in the years leading up to the market's peak.

As the single-family recovery begins to pick up steam, apartment demand will be sufficient to maintain moderate rent growth “if the pace of construction remains in line with the rate of apartment absorption,” Phillip writes. “Although a portion of current construction starts represents catching-up for the low level of starts immediately after the crisis, construction lenders will need to have enough discipline to curb excess construction in the multifamily segment.”

An additional factor to consider, according to the Moody's report, is that apartments do not represent the only game in town when it comes to rental properties. Single-family homes now comprise approximately one-third of all US rental stock, and thus exert a “considerable” influence on the rental sector.

It's a fact not lost on the Blackstone Group and Deutsche Bank, which the Wall Street Journal reported as planning to issue bonds backed by single-family rental income. Blackstone has spent about $5.5 billion since the beginning of 2012 to acquire 32,000 single-family homes as rentals, making it the leader in this market segment. GlobeSt.com will provide additional coverage of the pending securitization's implications.

“Single-family homes moving from owner-occupied to rental, or vice versa, can significantly affect the supply and demand balance of the total rental market,” Phillip writes. “To the extent the recovering housing market draws away potential renters, the impact will be partially offset by a transition of single-family rental stock back to the owner-occupied market,” especially as acquiring a single-family home becomes easier for would-be homeowners.

The multifamily properties securing CMBS and REIT debt typically have 100 or more units, according to Moody's. Structures containing five or more units make up about 45% of total rental properties. Single-family rental properties comprise about 33%, with the balance comprised of two- to four-unit buildings and other forms of rental housing.