Multifamily Sector, Energizer Bunny Share Common Trait, Says MBA’s Woodwell

by John Nelson

SAN DIEGO — The multifamily sector is like the Energizer Bunny, says Jamie Woodwell, vice president of commercial and multifamily research for the Mortgage Bankers Association (MBA). “It just keeps going and going and going.”

The product type remains an investment darling. Although 600,000 units are currently under construction nationally — maintaining an elevated level of building activity that is the highest since the mid-1970s — consumer demand remains strong.

According to Reis, the national apartment vacancy rate finished 2018 at 4.8 percent, up from 4.6 percent a year earlier. Apartment construction started to accelerate in 2017 and remained elevated throughout 2018, raising concerns that the apartment market was becoming overbuilt. Fortunately for developers, apartment occupancy growth has nearly kept pace with supply growth.

“We’ve got this great balance right now really between supply and demand on the multifamily side,” said Woodwell during Sunday’s opening session of the 2019 Commercial Real Estate Finance/Multifamily Housing Convention & Expo at the Manchester Grand Hyatt San Diego. Woodwell teamed up with Michael Fratantoni, chief economist for the MBA, to provide an economic overview and commercial real estate finance forecast.

The apartment sector is not only benefitting from strong real estate fundamentals, but also healthy increases in property values. According to Real Capital Analytics, which tracks several properties across real estate asset classes over time, the year-over-year increase in property values for apartments was 9 percent in 2018, edging out the industrial sector.

Storylines vary by sector

Since 2010, the U.S. economy has added 19 million office-using jobs, according to Woodwell. However, the average amount of office space per employee dropped from 225 square feet in 2010 to 150 square feet in 2017. Because companies have become more efficient at controlling their occupancy costs, “not all of those jobs are translating into the same demand for space that we might have seen before,” he explains.

On the retail front, consumer spending remains strong. The National Retail Federation estimates that retail sales in 2018 rose 4.6 percent to $3.68 trillion. That figure is subject to revision once the Commerce Department releases the data for December.

More good news for the shopping center industry: The association is forecasting that retail sales will increase between 3.8 percent and 4.4 percent in 2019.  (The sales figures exclude automobile dealers, gasoline stations and restaurants.)

“The consumer has been spending a lot to purchase things. More and more of that is taking place online,” says Woodwell. He points out that e-commerce now accounts for nearly 10 percent of all retail sales. “But because consumers are buying more, that still means that overall brick- -and-mortar retail sales are also growing.”

While e-commerce has disrupted the retail real estate universe, the industrial sector has benefited greatly. “All that e-commerce growth needs some place to live, and if we want to get things delivered the next day or the next hour, then that means more industrial space is coming closer to home.”

One emerging theme in commercial real estate is that each of these property types is also becoming more service-oriented as part of its value proposition, says Woodwell.

“If you talk to apartment developers, they are not talking about the square feet or the amenities within that unit so much as they’re talking about everything outside of that — the common space, the amenities. If you talk about office, you think about WeWork (which provides shared workspaces for startups). If you think about e-commerce and retail, it’s really this push toward a lot of commercial real estate [functioning] more and more as a service and less and less just about that square footage,” explains Woodwell.

MBA forecast

MBA projects commercial and multifamily mortgage originations to total $530 billion in 2019 — essentially flat from last year’s volume of $526 billion, and the record $530 billion in 2017.

Mortgage banker originations of multifamily mortgages are forecast to rise 1 percent this year to $264 billion, with total multifamily lending at $315 billion. MBA expects these originations totals to continue through 2020.

“We expect commercial mortgage borrowing and lending to remain near current levels in the coming years,” said Woodwell in a press release. “Slowing global and domestic growth may have an impact on overall demand, but readily available equity and debt for commercial real estate should support transaction volumes. A moderation of growth in property values and sustained net operating income (NOI) increases will likely extend the recent plateauing in transaction activity.”

Commercial/multifamily mortgage debt outstanding is expected to continue to grow in 2019, ending the year up 5 percent from 2018.  

“We’re up to $3.3 trillion of commercial and multifamily debt outstanding,” Woodwell informed the audience during Sunday’s special session in the hotel’s ballroom. “Banks are holding the largest share.”

— Matt Valley

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