Is the MF Supply/Demand Outlook Healthy?

Part 3 of 4:

A big question as of late has been whether or not the multifamily market will digest the new multifamily pipeline. Well, the market's future depends in large measure on supply and demand maintaining a healthy balance—and if the respondents to Capital One's RealShare Apartments survey are any indication, the outlook for the multifamily market looks good for the next few years. 

Almost three-quarters said that supply and demand were in balance or that one only slightly exceeded the other. Brian Sykes, SVP in the firm's Boston office, sheds light on the implications going forward in the below commentary.

The views expressed in this column are the author's own.

Admittedly, supply is running ahead of demand in some markets, like Austin and Washington, DC, but we expect that to be temporary. The demographic and financial trends all suggest that demand will stay ahead of supply for the near future in many markets. 

Not only are millennials finally moving out of their parents' basements and baby boomers converting their homes into retirement nest eggs, the number of renters of all shapes and sizes is growing. Household formation is up, and with housing prices rising and mortgage lenders remaining very selective, a higher-than-usual percentage of those new households are renting.

One of the implications of this sustained demand strength is that rents—even after several years of solid growth—will continue to rise, albeit likely at a slower pace. Many Western markets are at or above their prerecession peak, and developers asking premium rents are leasing up class A multi-hundred-unit properties at a rapid pace. 

At the same time, there is ample financing available to support an active and expanding market.  The agencies have a healthy presence, as do the banks and life companies. 

Borrowers seem to have gotten the message.  This year as last, 46% of our RealShare Apartments respondents told us that they expected to secure most of their financing from the banks, though those who identified agencies as the source for the bulk of their funding grew by four percentage points.  Our poll also revealed that the percentage of lenders turning to CMBS dropped significantly, from 8% last year to just 3% this year.

One area in which the supply-demand equation is out of equilibrium is affordable housing, especially in the major urban markets. The agencies are really trying to step up their activity in this space to help address this imbalance.