Developers bullish about multifamily market for third consecutive quarter

Developers of multifamily apartment buildings remain mostly positive about their markets’ current conditions, according to the latest quarterly tracking data that the National Association of Home Builders released on February 26.

NAHB’s Multifamily Production Index (MPI), based on responses from 93 developers across the country, stood at 54, on a scale of 0 to 100, in the fourth quarter of 2014. The Index—a composite measure of developer sentiments about construction for low-rent units, market-rate rentals, and for-sale condos—registered above 50 for each quarter last year, and has been hovering at 50 or higher since the first quarter of 2013.

The latest reading “is in line with our view that the multifamily segment of the industry has largely recovered from the downturn,” said NAHB Chief Economist David Crowe. “After increasing steadily over the past several years, multifamily production has now reached a healthy, sustainable level.”

Developers’ attitudes are also reflected in their willingness to take on future projects. In January, permits issued for buildings with five or more units rose by 13.8% to an annualized rate of 372,000, according to the Census Bureau.

A closer look at the numbers finds that developers’ sentiments about current conditions for market-rate starts, at an index of 62, were more robust than their sentiments for either low-rent starts (52) or for-sale condo starts (50).

NAHB’s Vacancy Index, which measures the industry’s perception about apartment vacancies, stood at 39 in the fourth quarter of 2014, compared to 38 for the same quarter a year earlier. (The lower the index, the fewer the perceived vacancies.) Interestingly, developers perceived lower vacancies for Class B apartments compared to either Class A or C apartments.

Developers’ attitudes are also reflected in their willingness to take on future projects. In January, permits issued for buildings with five or more units rose by 13.8% to an annualized rate of 372,000, according to preliminary estimates released by the Census Bureau on February 18.

Multifamily starts in January were up 24.5% over the same month a year earlier to an annualized rate of 381,000 units. In 2015, NAHB expects multifamily starts ultimately to increase modestly to around 358,000. “Because of strong job growth, we expect to be able to keep building for the foreseeable future,” said W. Dean Henry, CEO of Legacy Partners Residential in Foster City, Calif., and chairman of NAHB’s Multifamily Leadership Board.

Financing projects should not be an issue, as more lenders are jumping into this sector. Banks and Commercial Mortgage-Backed Securities lenders increased their market share of lending for multifamily projects through 2014, and are expected to be even bigger players this year, as Fannie Mae and Freddie Mac pull back. “Capital is plentiful and many lenders are expanding their target markets for investments,” observed Faron Thompson, head of Jones Lang LaSalle’s multifamily debt finance team.

It’s worth noting, though, that Fannie and Freddie expect demand for multifamily housing to soften a bit over the next two years, and for most of the growth to occur in a limited number of metro markets.