Number of New Renters Continues To Outpace Number of Renters Ready To Move into Homeownership
Revenue and income growth at multifamily properties across the country, backed by Freddie Mac loans, continued to significantly outpace inflation, despite the boom in multifamily building which has resulted in rising vacancies, higher expenses, and higher debt service.
CoStar News recently conducted an analysis of full year-end numbers for loans securitized in Freddie Mac K deals. According to their study, 2014 revenue and income grew at a 3.9% year-over-year growth rate as compared to a U.S. inflation rate 0.8%. This was the smallest gain for a calendar year since 2008.
Nearly 60% of the loans securitized in Freddie Mac K deals have reported full-year revenue and expense numbers for year-end 2014. Full year-end numbers for both 2013 and 2014 were available for $82.5 billion worth of multifamily properties. The portfolio included 2,928 apartment properties totaling 764,666 units, excluding health care units.
In a separate analysis, Wells Fargo Securities found that the aggregate growth rate of revenue and NOI for multifamily properties, included in conduit CMBS loans, was about 50 bps higher than those in the Freddie Mac portfolio.
The increase seen in multifamily revenue and income comes despite a rise in overall vacancy from 5.8% to 8.2%, year-over-year, for the Freddie Mac-securitized properties. Operating expenses at those properties also outpaced revenue growth, as did the annual debt service payment increase. Year-over-year, expenses increased 4.1% while the average debt service amount increased 4.5%.
Average revenue per room in 2014 totaled $13,002, up from $12,520 in 2013. The average NOI per room in 2014 totaled $7,183, an increase of $6,911 compared to 2013.
Significantly, of the 2,928 loans analyzed, only one loan was significantly delinquent, and only four loans showed being one month late in debt service. All other loans were paid up through June and none of the reporting properties showed an operating loss.
Demand Is Still Strong
According to CoStar Portfolio Strategy, the strong revenue and NOI performance reflects the surprising continued national demand for apartments, as renters quickly absorb newly built apartment units and keep rental growth and vacancies at healthy levels.
As of the first quarter, CoStar national multifamily data showed vacancies fluctuating between 4% and 4.5%, with the year-over-year same-store rental growth, for properties with 20 units or more, above 3%. The national estimates are based on CoStar multifamily data as of the end of the first quarter of 2015.
While the national numbers may carry some degree of volatility, demand remains quite favorable, making the turn in the cycle slower than anticipated, CoStar analysis shows.
At the center of the prolonged demand-supply balance is an environment that favors renting over owning. Despite gradually improving overall economic conditions, persistently low interest rates, and a healthier single-family housing market, a large number of young households continue to prefer renting over owning, or are not financially ready for homeownership.
One contributing factor, according to CoStar Portfolio Strategy, is that younger renters continue to face a slow employment market. As of March 2015, the unemployment rate for households aged 20-24 was still above 10%.
On top of that, part-time employment for this group is still high compared with historical averages. Part-time jobs currently account for more than 36% of their total employment, far above the approximately 28% annual average prior to the recession.
As a result, CoStar expects the number of new renters will continue to increase faster than current renters become homeowners. While that trend happens, the apartment market will continue to benefit and the turn of the cycle will continue to be very slow.
Individual Property Highlights
The five Freddie Mac securitized complexes reporting the highest revenue in 2014 were spread across the East and West coast markets.