Stress-Tested Every Way, Freddie Mac Finds MF Is Still A Winner

Freddie Mac headquarters

WASHINGTON, DC—By any measure, 2015 was the high water mark for multifamily supply. That year, some 306,000 multifamily units were completed and entered the market, according to Freddie Mac’s Multifamily Outlook for 2016 [ PDF ] — the most in a single year since 1989. From that high perch, you might think there is no place for multifamily supply to go but down. You’d be wrong. Freddie Mac’s newly-released outlook for this asset class is remarkably optimistic, given how long multifamily has been riding high  in this cycle. There are slight signs here and there of softening in some markets, instances where the rental rate growth is moderating but overall the asset class is expected to perform this year above historical norms. Again. Passing the Stress Test Even when Freddie Mac stress-tested for weak economic growth, multifamily still thrived, albeit not at the same robust levels of the past few years. Specifically, Freddie Mac stress tested income levels against various economic scenarios. Its findings, therefore, are of wider interest than just the apartment sector. It tested strong growth scenarios, slow growth, moderate recession and low oil prices. “These analyses reveal that even in stressed scenarios, gross income in nearly all markets is projected to grow, albeit at lower rates compared to the baseline scenario,” Freddie Mac found. And the baseline scenario is pretty good. Following 2015 banner year, in 2016 “supply will enter the market at the fastest pace since the 1980s and plans for more construction will continue to increase,” Steven Guggenmos, vice president of research & modeling for the GSE, wrote in a blog post about the findings. “Strong demand for apartments will absorb most of the new supply. As a result, the national vacancy rate will stay below the historical average throughout the year. In turn, rent growth will remain strong until new supply can catch up with demand.” The other scenarios are not as rosy, of course, but neither do they point to a dramatic decline. In the case of slow growth, all metros will see potential for lower gross income growth, but the majority will remain above their historical averages. A moderate recession will cause all metros to drop to or below their historical averages; some will turn negative. In the low-oil-price scenario, markets in Texas, including Houston, Austin, Dallas, San Antonio, and Ft. Worth – along with Denver and Oklahoma City would feel the biggest impact on gross income growth in 2016, but growth will remain above historical averages in each of those markets, except for Houston and Austin. Varying Vacancy Trends But even without a moderate recession or collapse of oil prices, there are signs in some markets that fundamentals are starting to moderate. The frantic pace of construction of the last few years is translating into new supply entering the pipeline in many cities, causing vacancy rates to rise a bit. Some cities, though, almost seem to be defying this trend. Despite a meaningful slowdown in construction in the Washington DC area over the past six months, the gap between 2016 and historical vacancy rates will widen as new supply enters the market, Freddie Mac concludes. More or less, though, multifamily’s story line is expected to play out like this: Rents will continue to grow this year, but more slowly than in 2015. Rents will almost certainly exceed historical averages. Strong demand, meanwhile, will continue to push back against the increased supply – more so, than many had expected, Freddie Mac predicted. “Most metros will see growth rates moderate in 2016, but much less than previously anticipated,” according to the Outlook. “The relatively low vacancy rate in most markets also will continue to contribute to the strong rent growth; high occupancy coupled with high demand allows landlords to increase rents.” Another Bonanza for Capital Markets At the same time, appetite in the capital markets for these loans is expected to remain robust, giving lenders an exit strategy so they can originate more loans. Annual industry originations are likely to go above the $256 billion reached in 2015, Guggenmos wrote, “making 2016 another record year.” Freddie Mac estimates that origination volume will reach between $240 billion and $250 billion this year. The reason for the higher originations expected in 2016 is due to a number of reasons,  including increasing property prices, an increasing construction pipeline, a large wave of maturities, and a relatively low – albeit starting to rise – interest rate environment, according to the report.