The Multi-Family sector of the commercial real estate market is indeed one of the strongest of all sectors within the commercial market. Bolstered by rising home prices, consistent vacancy decreases and rental rate increases, multi-family ownership is looking very much like the poster child for commercial investment opportunities. Stable and improving economies in major metropolitan areas are also fueling the demand for rental housing throughout the United States. Perhaps the brightest outlook for multi-family investors is the continued slow down in the addition of new product. Starts of new construction in the multi-family housing sector are continuing the slow trend that we have seen for a couple of years now. Condo conversions have began to decline as well. These conversions were having a significant effect on the multi-family supply (taking inventory out of the rental supply) which has caused a tightening in opportunities to purchase and maintain them as rental housing. We are left to conclude that rising rental rates, diminishing vacancies, more demand and less supply all point to a strong outlook for successful Multi-family investments.
During the calendar year 2004 Multi-family rental units saw the largest vacancy rates ever recorded. Vacancy rates nationally topped 10.4% in the first quarter of the year and continued to stay above 10% for at least Four more quarters. This trend has continued through the Third quarter of 2006 but is poised to make a dramatic change. From 2004 to 2006 that vacancy rate has recovered to 9.5% in the same first quarter of the year. With the recovering economies and housing affordability problems it is clear that the rental housing market will be filling up a lot of vacancies existing in many markets. If indeed this is the case, the lack of new multi-family units will allow for even larger rental rate increases as well as inducing higher occupancies.
In general the Multi-family sector is looking very very good. However, there are markets that may not be as strong as others. Good information is essential to making good investment decisions. Good information comes from deeply knowing the market. Local expertise particular to a local segment of the market can be critical in making wise decisions. For instance, one factor that might be looked at heavily when making decisions about investing in one market or another could be what effect condo conversions are having in a paticular market. Many condo conversions are having difficulty in local markets. There are several metropolitan areas that are having problems with conversions that have, or are failing. The units will undoubtedly be bringing product back on the rental market and will effect significantly the supply in that market.The down side to some local market expertise however comes when lenders do not have that information and are not informed properly. Hence they are shackled by underwriting policies that will not allow them to see the price and performance dynamics in the market.
Condo conversions have slowed dramatically in the past year. Several Metropolitan areas have seen far too many conversions and meager sales. Most of this problem is found in the high end conversions in areas such as San Diego, Chicago, South Florida, Las Vegas, Phoenix, and New York City. Many of these projects are being returned to the rental housing market and will indeed effect the rental market significantly. This condo conversions craze has been hit hard by affordability issues as well as an over supply which has far outpaced the demand for several years.
Areas that are experiencing good economic growth and strength such as Los Angeles and Washington D.C. Are expected to see a 5% to 6% increase in rental rates and the same, or nearly the same increase in occupancies in the coming year. However, some housing markets are experiencing construction upswings in the multi-family sector such as Charlotte, N.C., Nashville, Tenn., Kansas City, Mo. These markets are expected to continue being strong markets even with the construction expected this year.
The next year outlook is great for the informed and well positioned investor. Local markets with the economic indicators pointing in the right direction, will provide the best opportunities for investors looking to purchase and benefit in the multi-family market.
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