As more and more Americans choose to live in apartments, the dynamics of supply and demand in the secondary market has adjusted itself to keep up with the rising number of renters.

"Demand for multifamily mortgage loans and securities is absolutely red hot," said Michael Youngblood, managing director of real estate at Banc of America Securities. "In fact one could safely describe it as insatiable."

However, multifamily and apartment mortgage originations are down this year, mostly due to an increase in interest rates, which are hovering around 8%, up from around 6% a year ago. The multifamily sector is generally more interest-rate sensitive than other housing sectors, and after a refinancing boom in 1998 and 1999, there just is not that much product being produced.

"And therefore the run-up in rates through mid-May hit that sector of the housing market particularly hard," Youngblood said. "So we had a flagging of issuance and origination relative to existing demand."

The choice of apartment living has become more popular, though, according to a study published by the apartment industry trade group National Multi Housing Council. That, combined with the second largest immigration wave the United States has experienced over the last decade, has enabled demand for purchasing apartment mortgages to remain attractive.

Three major factors are pulling together to create demand for multifamily and apartment mortgages and their corresponding securities: government-sponsored enterprises are attracted to these loans because it enables them to support low- and moderate-income housing; conduit lenders use these mortgages to achieve product diversification and lower credit enhancement; to diversify commercial mortgage-backed securities portfolios, there has also been demand from Ginnie Mae funds, pension funds and money managers.

Alongside demand, the apartment industry has grown to $370 billion in loans outstanding from $291 million over an eight year period.

"We're building about 300,000 units a year," said Shekar Narasimhan, managing director at Prudential Mortgage Capital Corp. "And that's about right for what you would have to do in order to keep up with demand and overcome the fact that we have quite a bit of demolition activity every year."

Freddie Mac is coming off the heels of two record-breaking years, with $8 billion in multifamily financing in 1999, and $7 billion in 1998. The company does not see another record year, but expects numbers to be close to or slightly below 1998. "We think we'll maintain our share of origination as the pie itself shrinks in 2000," said Douglas Robinson, spokesman for Freddie Mac.

The company recently introduced a line-of-credit product to help owners of property manage their assets and liabilities a little better. "Banks have traditionally provided lines of credit for different things," Robinson said. "Ours are collateralized by residential real estate apartments."

Narasimhan said that apartment mortgages are still a preferred debt instrument. "Most people would love to make an apartment loan over pretty much any other kind of income property loan," he said. "There's lots of competition for it, there's plenty of capital available. And you need to have some apartment loans in every commercial mortgage-backed security in order to be able to say, I've got a diversified pool.'"

As supply continues to shrink, there is no certain bet that the trend in apartment and multifamily real estate will continue forever. However, Narasinham noted, "Organizations need to be very smart, manage their expenses well, manage their capacity well and still focus on the fact that this is a very good stable real estate market with tremendous amounts of potential."

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