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Multifamily production skyrockets in 2011, up 178% from 2008

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Up, up, and away

Without question, the multifamily sector has kept much of the real estate industry afloat in recent years as homeowners lose homes, rent apartments and make construction possible despite continued difficulty with construction loans. According to the National Association of Home Builders’ (NAHB) Multifamily Production Index (MPI), the second quarter of 2011 continued to show improvement for the fourth quarter in a row.

The MPI jumped from 41.7 in the first quarter of the year to 44.4 in the second quarter, representing a marked 178 percent improvement from the MPI record low of 16.0 points in the third quarter 2008.

Cautious optimism

According to the NAHB, “The index provides a composite measure of three key elements of the multifamily housing market: construction of low-rent units, construction of market-rate-rent units, and construction of “for sale” units. The index and all of its components are scaled so that any number over 50 indicates that more respondents report conditions are improving than report conditions are getting worse. In the second quarter of 2011, a majority of developers saw improvements in the production of low-rent and market-rate units.”

“Multifamily rental construction is trending upward, and it is definitely the brightest sector in the broader housing market,” said NAHB Chief Economist David Crowe. “However, the entire housing market continues to be very fragile and subject to many external pressures, including an ongoing shortage of financing for new projects.”

Developers expectations are cautiously optimistic regarding the remainder of 2011, noting market uncertainty (with builders and consumers) as a “dampening effect.”

“Even though multifamily is trending upward, production is still very low in a historic context and in the context of what we project is necessary to meet long-term demand,” Crowe said. With the number of multifamily starts and new “accidental landlords,” we do not share the certainty that demand for multifamily units will continue to rise indefinitely, but rather as a short term effect of the recession.

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28 Comments

28 Comments

  1. Manhattan Beach Realtor

    September 18, 2011 at 2:02 pm

    With rental rates on the rise along with unemployment, and an increasing number of previous buyers now turned long term renters via property default, it's no wonder that multifamily residential is booming! But builders and investors should remember that everything comes in cycles, and the pendulum will one day (maybe sooner than expected) swing in the other direction. My personal take is that this part of the RE cycle could last for another 5-10 years, until consumer balance sheets are sufficiently repairs, savings re-accumulated, and labor markets sorted out from the great recession that has yet to really end. But end it will and new waves of renters-turned-buyers will hit the market, reversing the process.

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Housing News

San Francisco suburb bans smoking inside all condos, apartments

In a unanimous vote, the city of San Rafael joins various other California cities to ban smoking inside of any multi-family home.

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smoking ban

smoking ban

No butts about it, smoking in apartments is illegal

The City Council of San Rafael, just 15 miles north of San Francisco has unanimously voted to ban smoking inside of any multi-family home, whether the tenant is a renter or owns the unit or building. According to Reuters1, nine other municipalities in California have already taken the same measure, adding the 57,000 residents of San Rafael to the non-smoking roster.

The ban includes condos, duplexes, townhomes, apartments, or any other multi-unit housing, and goes as far as simultaneously making it illegal to smoke on downtown streets. Reuters reports it is the city’s hope that other cities across the country will follow their lead and do the same.

“We are happy to blaze a trail,” Mayor Gary Phillips said, pun likely intended. “We’re most happy to be in the forefront of the issue because we think it will greatly benefit our residents and those visiting San Rafael, and we think it will set the tone for other cities as well.”

According to the American Lung Association, California is the only state so far where smoking has been banned in homes. The move is praised by anti-smoking advocates, but smokers may be upset by the move. Privacy advocates are likely to continue speaking out against the in-home smoking bans, as what a person does in the privacy of their own home is just that – private.

“This is tyranny”

“This proposed smoking ban actually intends to punish people for what they do in their own homes,” Thomas Ruppenthal told the council. “I really feel this is tyranny.”

Some have taken to Twitter to ask what’s next? @Aaron643 asks, “In your own home…what’s next? Soda? Fatty foods?”

San Rafael’s ordinance is applicable to all multi-family homes, be they new or old, owned or rented, while other cities have installed anti-smoking bans inside homes with rules such as restricting the ban to new construction.

Look for other California cities to take similar measures, and for the movement to leak into other states.

1Reuters’ report on San Rafael’s new law

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Leasing

New site for landlords, using new credit scoring

Independent landlords have access to traditional screening methods, but until today have not been able to use a new predictive scoring model.

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mortgage trends

CoreLogic launches MyRental.com

In an effort to help independent landlords lower tenant risk, CoreLogic has announced today their newest service, MyRental.com, a comprehensive tenant screening data which includes the new supplementary credit scores previously only available to the mortgage industry.

The predictive credit scores were announced in 2011 and made public this spring, it includes scoring for data previously ignored in a credit check like information on evictions, applications for payday loans, child support judgments, property tax liens, the status of homeowner’s association dues, whether or not someone owns a house (or other properties credit agencies miss) or is underwater, and could soon include utility bills or cellphone bill payment histories.

CoreLogic says that the new service provides the same applicant rental histories, eviction data, and criminal reports to small landlords who rent properties independently as those large apartment complexes and property management companies use to mitigate renter-applicant risk.

Purposeful and accidental landlords on the rise

“The recent growth in U.S. rental households is sparking demand for risk management tools tailored for independent landlords,” said Tim Grace, senior vice president of data & analytics product management at CoreLogic. “Previously, small landlords relied on their instincts, a few documents, and applicant-supplied character references to assess rental applicants. Now they have a tool to limit uncertainty and accelerate decision-making with more reliable information to qualify renters.”

“Very high-risk and very low-risk rental applicants are easy to spot but the majority of applicants are average risk,” said Bagrat Bayburtian, vice president, product management at CoreLogic. “By basing their decisions on a few factors—income, references and bank information—landlords accidently eliminate high-quality tenants. Independent landlords now have access to tenant scoring from MyRental.com to help avoid these mistakes.”

The company says that MyRental.com offers a predictive score which indicates the likelihood that the applicant will satisfy the lease. Using inquiry, credit, and eviction data, MyRental.com generates a three-digit score that summarizes the potential risk of the applicant. Just like a credit score predicts the likelihood that a loan will go unpaid, the tenant score from MyRental.com returns a three-digit number that indicates the risk that an applicant will not fulfill their lease. This screening solution enables each property manager to set the risk level that is acceptable to their property.

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Economic News

Multifamily developer sentiment hits highest level since 2005

As a forward-looking economic indicator, we look at the improving sentiment of multifamily developers as a sign of improving market health overall.

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Production on the rise

The Multifamily Production Index (MPI), released by the National Association of Home Builders (NAHB) today, improved for the eighth consecutive quarter with an index level of 54, marking the index’s highest reading since the second quarter of 2005.

The MPI measures builder and developer sentiment about current conditions in the apartment and condominium market on a scale of 0 to 100, rising from 51 in the first quarter to 54 in the second quarter.

According to the NAHB, “The MPI provides a composite measure of three key elements of the multifamily housing market: construction of low-rent units, market-rate rental units and “for-sale” units, or condominiums. The index and all of its components are scaled so that any number over 50 indicates that more respondents report conditions are improving than report conditions are getting worse.”

With this sentiment reading, multifamily has officially surpassed the optimism felt in the single-family new home market.

Recent increases in the MPI

In the second quarter of 2012, the MPI component tracking builder and developer perceptions of market-rate rental properties recorded a level of 63 and has been over 60 for four consecutive quarters—the longest sustained period of strength since the inception of the index in 2003. For-sale units had its highest reading since the fourth quarter of 2005, coming in at 41, while low-rent units recorded an all-time high of 61.

“The apartment and condo housing sector is continuing on a path of steady recovery as new construction has increased to try to keep up with current consumer demand,” said W. Dean Henry, CEO of Legacy Partners Residential, and chairman of NAHB’s Multifamily Leadership Board. “However, credit continues to be an issue for many developers around the country, making it difficult to keep pace with this demand.”

The improving Multifamily Vacancy Index

The Multifamily Vacancy Index (MVI), which measures the multifamily housing industry’s perception of vacancies, increased five points to 36, bringing it back approximately to the level it sustained throughout 2011. With the MVI, lower numbers indicate fewer vacancies. After peaking at 70 in the second quarter of 2009, the MVI declined consistently through 2010, then held steady at either 35 or 36 in every quarter of 2011.

“The strength of the MPI suggests that multifamily production is likely to increase somewhat going forward,” said NAHB Chief Economist, Dr. David Crowe. “Multifamily production has already recovered substantially from a historic low of about 110,000 starts a year in 2009 and 2010 to the current annual rate of a little over 200,000. However, prior to the downturn multifamily starts remained about 300,000 per year for 12 consecutive years, so there is room for further improvement before apartment and condo production return to normal, sustainable levels.”

The NAHB reports that “Historically, the MPI and MVI have performed well as leading indicators of U.S. Census figures for multifamily starts and vacancy rates, providing information on likely movement in the Census figures one to three quarters in advance.”

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