Fitch Predicts Ebb in M-F Demand

Fitch expects multi-family demand growth to ebb from current levels; however, it does not anticipate a material retreat.

A report released in December by Fitch Ratings reveals that U.S. multi-family REITs may be seeing a shift downward after a few years of strong activity. 

Fitch expects multi-family demand growth to ebb from current levels; however, it does not anticipate a material retreat. The report looked at the key issues facing the sector and what it found was a burgeoning number of risks that were either on an individual basis unlikely or their impact was manageable.

The three areas that were examined were sustainability of demand, what’s going on with supply and what’s the future with the GSEs. Muted supply and superior access to capital have led to improvements in both operating and credit profiles of multi-family REITs, however, longer-term risks are increasing.

“The end of September, [GSEs] comprised 45 percent of the mortgages outstanding in the sector. If you look at what they did through the cycle, they were the only one making up origination so there’s a generally a pull-back of $91 million across all other originators,” Britton Costa, associate director within the REITs Group of Fitch Ratings, told Commercial Property Executive. “GSEs had grown their portfolio by $85 billion. GSEs were really the only ones lending. They are the largest lender even today.” 

In the report, Fitch estimates that 80 percent of the 2009-2011 growth in multi-family demand was derived from declining home ownership. 

According to Costa, the current euphoric multi-family environment will amplify the fickle psyche of investors. Over time, multi-family REIT demand and operating fundamentals will slow down as rents become less affordable and interest in home ownership rises.

“As seen time and again, particularly in leverageable capital-intensive sectors such as commercial real estate, confidence and expectations can cause material swings in capital availability and asset pricing,” Costa said. “Although each risk is on its own unlikely or manageable, even modest reversals in positive trends, when combined with these risks, can have a meaningful impact on fundamentals and capital availability.” 

Looking forward, Fitch expects decreasing rental affordability and the increasing relative/absolute attractiveness of home ownership will cause multi-family demand and operating fundamentals to more closely track economic growth.

Fannie Mae and Freddie Mac have increased their exposure to the multi-family sector by $76 billion over the last five years to offset a similar decline in mortgage availability from traditional lenders. However, there is limited political will to keep the GSEs under conservatorship indefinitely.   

If the GSEs slow their multi-family lending, Costa said that it seems none of the banks, life insurance companies or the CMBS market appears willing, nor have the capacity to entirely fill the void.