An increase in new builds in the multifamily sector in recent months has raised some concerns that the market may face supply risk down the line; but CMBS industry analysts said it’s probably premature to suggest that the sector is headed towards a bubble.
While the multifamily sector is the only space to see a substantial rise in construction, the rate of new starts today are still well below the average levels of the past twenty years, according to Barclays Capital CMBS 2013 outlook report. “We expect increased demand from a slowly improving economy to easily make up for the rise in supply in the coming years,” said analysts in the report.
Steep vacancy declines, coupled with strong rent growth since 2009, and the continuing decline of home ownership over the next two years, are likely to support continued growth in the market.
“No doubt that multifamily prices have rebounded significantly driven by agency lending and declines in home ownership,” said Richard Hill, director of CMBS & CLO strategy at the Royal Bank of Scotland. “However, I think it’s a big stretch to call it a ‘bubble’.”
Harris Trifon director, global head of CRE debt research at Deutsche Bank also said that it’s not likely that the market is headed for a bubble.
“There are certain signs of more robust construction activity and multifamily is the only sector where we have seen that but at the same time we have seen all-time lows in the vacancy rate and substantial increases in rent that we have seen in almost all rental markets, across the U.S., supported by the structural shift to lower home ownership rates in the U.S. There are signs that things are heating up but I don’t think that we are headed to a bubble,” he said.
However, analysts at Barclays cautioned that select areas could face some supply risk. The multifamily sector could for example se demand decrease as interest grows in REO-to-rental programs, which look to buy and lease out distressed single-family properties. “This may siphon away some of the demand from multifamily buildings, especially in areas such as Miami, Phoenix and Chicago, where much of this activity is centered,” said Barclays analysts.