Multifamily: Still in vogue?

October 21st, 2009  ::  Posted by CRE Console

During the boom, the multifamily asset class was one of investors’ favorites. Remember the Peter Cooper Village and Stuyvesant Town deal? With a sale price of $5.4 billion, the deal was the largest single asset sale in U.S. history and was so aggressively underwritten that it is now reportedly worth 62% less than it sold for in 2006.  While this deal is an extreme example, there are many lower-profile multifamily deals which were also aggressively underwritten during this time.

Why were apartment deals so aggressively underwritten? There were a multitude of reasons, but one of the most popular was that it was a pure play against American homeownership. The general assumption was that (at some point) credit standards on home loans would become more stringent. And when they did, more people would have to rent, rather than own. When the sub-prime crisis hit in September 2007, it only validated this assumption and investors continued to aggressively pursue apartment deals. Fewer people able to qualify for a mortgage meant more renters, right?

This may have been the case, if the current recession didn’t reach the depths that it has. As the country moved deeper into a recession, more and more apartment owners found it increasingly difficult to service their (heavy) debt loads.

The fallacy of the “fewer home-buyers mean more renters” assumption, was that household formation would continue at its prior rate. Instead, as the recession ran deeper, it reduced the propensity to create new households. For example, the higher the likelihood you move in with a roommate (or worse, back in with mom and dad) means you have a lower propensity to form a new “household”. Simply put, lower rates of household formation, mean lower demand for apartments.

But what does the future look like for apartments? Many participants feel it is the best time in years to buy multifamily product. A recent article in Commercial Property Executive reports that a large proportion of investors intend on boosting their multifamily acquisition activity in 2010.

“According to Jones Lang LaSalle’s 2010 Multifamily Forecast Survey, 90 percent of the 200 owners and operators surveyed plan to boost their activity in the sector next year, compared to the 68 percent of respondents who had such plans last year.”

There seems to be a reasonable level of consensus about the apartment play. In a recent talk at the NYU Schack Institute of Real Estate, Dr. Peter Linneman noted that he expects multifamily will be the 1st asset class to recover, as the population continues to increase and development remains low.

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