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Builders concentrate on rental properties as housing market declines

By Justin Hunter

Real estate property builders have been experiencing financial setbacks month-after-month since the end of 2005. As the housing market’s affordability index has reached month-over-month lows, buyers have been waiting for some good news to start investing again. Even though home prices have started to drop and sales increased slightly in September from August, many prospective buyers have turned to the rental market while they wait for prices to fall even further.

Realty Times columnist, Peter Mosca, explains how builder are now turning their efforts towards supporting the rental market, in his article, “With Residential Home Sales Correcting, Builders Look to Growing Multifamily Market,” which was posted October 26, 2006.

“With the residential single-family home market correcting itself and affordability for most prospective buyers on the decline, real estate consumers are putting their dreams of homeownership or a vacation home on hold, prompting the demand for rental property to rise.”

All the signs point to a hot multifamily rental market that shows no signs of slowing, with rising occupancy rates, rising monthly rents and increased traffic all over the rental board.

“‘The fact real estate generates more wealth is and will always be accurate for one simple reason, real estate, or more accurately, land control is the basis of all wealth,’ explained Michael Anderson, RealSource Principal, whose firm brokered $400 million in multifamily product through its debt and equity financing and broker referral programs.”

This news comes from a recent announcement from the National Association of Home Builders' (NAHB) that its Multifamily Stock Index (MFSI) is at its highest rating of all time.

“‘I think the confidence in the market reflects the strong fundamentals for the rental side of the multifamily industry right now,’ said Leonard Wood, director of Wood Partners, LLC and chairman of NAHB's Multifamily Leadership Board. ‘In many markets across the country, the supply of new rental units has not kept up with demand and that is pushing up occupancy rates, rents and profits.’”

This new rental boom has most of the characteristics of the housing boom from 2000 to 2005, which saw certain area markets experience inflated prices of over 400 percent. As demand continues to grow, so will the rental rates.

“Recognizing a possible trend toward multifamily construction, government agencies and lenders are getting together to make it easier for developers to secure loans. The California Housing Finance Agency (CalHFA) announced recently it has reduced interest rates for developers of multifamily housing. CalHFA, which earlier this year introduced new programs to encourage the construction or rehabilitation of multifamily housing, reduced the interest rate on 30-year loans for multifamily projects from 5.80 percent to 5.55 percent.”

The multifamily market has to keep constructing complexes to support the unaffordable single-family housing market.

Interest rates are at historic lows for multifamily housing and mortgage terms have become increasingly favorable for multifamily housing borrowers.

Builders and home buyers that have been turned away over the past year are finding salvage in the multifamily market.

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