Fundamentally Speaking: Multifamily Market Still Strong for REITs

In the latest edition of Fundamentally Speaking, Calvin Schnure, NAREIT’s senior vice president for research and industry information, said economic developments haven’t hampered the strength of the multifamily real estate market.

Concerns about new multifamily supply and a possible shift to home buying have not materialized, Schnure noted.

“We’re not seeing that at all,” Schnure said. He pointed out that rental occupancy surged in the fourth quarter. Over the past four quarters the increase in rental occupancy was about 2 million units, Schnure noted, versus a long-term average of about 300,000.

“This is probably just the leading edge,” said Schnure, pointing out that the dynamics of household behavior are very closely tied to the job market. He observed that the normal level of household formation is about 1.25 million per year, but only about half that number of new households formed during the recession.

Schnure anticipates that there are about 3 million to 4 million new households waiting to form.  “Should the job strength continue, we’re probably going to see a lot more rental occupancy, keeping rental vacancy rates low, with fairly good rent growth,” he said.

Looking more broadly, Schnure observed that despite a slowdown in fourth quarter gross domestic product (GDP), consumer spending accelerated.

“The economy was strong where it counts,” Schnure said.

GDP growth slowed to 2.6 percent in the fourth quarter from 5.0 percent in the third quarter. Meanwhile, consumer spending grew 4.3 percent in the fourth quarter, which is “by far the fastest pace we’ve seen in the recovery,” according to Schnure.

One area to watch going forward is business investment spending, Schnure noted, which decreased 1.9 percent in the fourth quarter following a gain of 11 percent the previous quarter.

“It was a big, surprising pull back,” Schnure observed.

Looking more broadly, Schnure said the economy is showing “the beginning of a virtuous cycle” due to strong consumer spending and business sales, which are leading to increased hiring.

“We’ve seen very good job growth,” Schnure commented. “One of the big stories in the fourth quarter was how much the labor market accelerated.”