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Housing Recovery Could Slow Multifamily Growth

09/26/2012 | By Carisa Chappell

Housing Recovery Could Slow Multifamily Growth

As signs emerge indicating that the U.S. housing market is recovering, there's one question that Ric Campo, CEO of apartment REIT Camden Property Trust (NYSE: CPT), has been asked "a million times" lately: What does that mean for the flourishing multifamily sector?

Campo contends that there is room for both the single-family housing market and multifamily sector to succeed at the same time.

"I think an improved housing market is great for the multifamily sector. When you think about it, our economy is not hitting on all cylinders because housing has been down," he said. "They have coexisted in the past, and both have done well."

Favorable buying conditions and low interest rates apparently have prompted homebuyers to take advantage of the affordable housing stock. Home sales improved in August, and the national median sale price increased for the sixth straight month, according to a September report by the National Association of Realtors (NAR). New home construction also rose in August by 2.3 percent, according to figures released by HUD and the U.S. Census Bureau.

Rich Anderson, an analyst with BMO Capital Markets, said he thinks the housing recovery will impact multifamily REITs.

"Being in the rental business has been the name of the game lately, but the American dream has not been to rent," Anderson said. "It will always be to own, so that issue in of itself is a negative" for the multifamily sector.

Andrew McCulloch, an analyst with Green Street Advisors, said he doesn't foresee a scenario in which the housing recovery would wipe out the strength of the sector.

"After several false bottoms, it does appear that the single-family market is on the mend," he said. "This likely means the tailwind that apartment operators have been enjoying from a weak housing market is fading. That said, we don't expect the housing pendulum to swing back to home-buying in a way that would completely derail apartment fundamentals."

Campo disputes the idea that housing market collapse represented a massive boon to the multifamily sector. Many of the 4 million people who left homeownership behind rented single-family housing, not apartments, Campo explained. As such, the sector only got an incremental demand bump from the housing crash.

Anderson did note that the housing recovery should strengthen the job market, which he said would be a benefit to the multifamily sector.

"We can't live in a weak housing market forever," Anderson said.

The supply-demand dynamic in the apartment market is also working in favor of apartment owners, according to Camden's CEO. Campo explained that because multifamily REITs weren't building new apartment developments during the recession, any new supply now is, in effect, catching up to meet demand. According to McCulloch, however, that process will eventually push down rents.

"An improving single-family market, along with the introduction of new supply, will almost assuredly cause rent growth to slow," McCulloch said. "But a host of structural and demographic factors should keep demand for apartments healthy for several years."