Freddie Mac is a major player in commercial multifamily lending. The GSE (Government Sponsored Enterprise) has more than $80 billion in capital tied to multifamily investments in just the last 5 years. Obviously, they spend a lot of resources analyzing demographic and economic trends that affect their investments. In their recent mid-year report, Freddie Mac shared some long-term bullish observations about the outlook for commercial multifamily:
- The economy, specifically unemployment, continues to slowly improve. A record low workforce participation rate is driving some of these trends. Still, the fact remains that many markets are experiencing an increasingly healthy employment picture. This is lifting the economy and having a positive impact on multifamily assets in those markets.
- Since the Great Recession, the formation of new households has trailed population growth. This is the reverse of historical trends. This phenomenon resulted in a shortage of almost 4 million new households. This noticeably and negatively impacted both residential and multifamily real estate sectors.
- Millennials made up nearly 75% of this shortfall. The Great Recession hit the Echo Boom generation hard. Record unemployment and crippling student debt kept many millennials out of the housing market. Additionally, millennials have been the slowest to recover from the Great Recession. As a result, many young Americans were forced to stay at home while they found and maintained steady employment.
- The good news: Millennials are finally re-entering the renter pool. The number of millennials who doubled up with relatives for housing declined slightly in the past year. Plus, their employment picture is improving. We can expect to see millennials to move out and start their own households. This trend should continue for the next decade and will result in 3 million households re-entering the market. This number is above the typical household formation rate driven by population growth.
- Multifamily starts increased dramatically in the last year. But they are only now beginning to keep pace with increasing demand. Freddie Mac forecasts the need for 440,000 new multifamily units per year for the next decade. Additionally, single family home starts are also well below expected demand. This will keep more renters in the multifamily pool until inventory catches up to demand.
- As predicted, Freddie Mac is experiencing a decrease in originations for multifamily loans. This is good news. Private lenders are re-entering the multifamily market, reducing GSE market share.
- Cap Rates will rise slightly, but will remain tightly aligned with the expected rise in 10-Year Treasury rates. Mortgage rates are also expected to rise. This will impede the path to homeownership keeping more Americans in the renter pool.
- Freddie Mac is expecting rent growth to outpace inflation for almost all major markets in 2015.
- Market Selection is becoming more important. Markets with poor fundamentals will see slow to non-existent growth. Markets with healthy, diverse economies will continue to see growth across the apartment sector. The report has several graphs that show which markets will fall into each category and why.