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. For builders, rising occupancy rates and monthly rents, and increased traffic at all classes of rental apartments are all signals that multifamily is hot and will be for some time to come.

"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. "If I were a builder, I'd give serious consideration to adding or increasing a multifamily product line as the rush to convert rental condo units to for-sale properties, coupled with a number of market factors, has left a demand vacuum for rental housing."

This news comes on the heels of a recent announcement from the National Association of Home Builders' (NAHB) that its Multifamily Stock Index (MFSI) is at its highest reading of all time. NAHB's Multifamily Stock Index tracks the total returns (including capital gains and dividends) of 24 publicly traded firms principally involved in the ownership and management of apartments. During the month of August, the MFSI reached 3,328, its highest reading of all time, and almost 30 percent higher than it was a year ago. In comparison, the S&P 500 index with dividends reinvested gained 2.40 percent in August and is about 9 percent higher now than it was a year ago.

"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."

"It would be prudent for builders to conduct due diligence before they break ground because there are markets where occupancy is already peaking and local economies are not producing as many jobs," added Anderson, whose research staff has pinpointed top performing multifamily markets for 17 consecutive years. "Our qualitative and quantitative data shows that there are regions across the U.S. that are mature and uniquely positioned to handle a potential economic downturn."

The latest increase in the MFSI widened the performance gap -- or percentage difference -- dramatically between the two indexes, with the MFSI outperforming the S&P 500 with dividends by 178 percent. This percentage difference comes despite a very strong rebound -- 72 percent -- by the S&P 500, since that index dipped to its lowest level in late 2002. During the same 46-month period, the MFSI has risen 134 percent.

"Many of these companies were able to take advantage of the condo boom over the last several years, and now that the for-sale market is cooling, they can expect a strong performance from their rental apartment operations," said Elliot Eisenberg, Ph.D., a housing policy economist at NAHB and creator of the MFSI.

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.

"By lowering these interest rates, CalHFA encourages builders and developers to create more affordable rental housing," said Theresa Parker, CalHFA Executive Director. "These lower interest rates and other new programs will give affordable housing developers more financing options to meet the housing needs of Californians."

"Not only are interest rates for multifamily housing at historical lows but mortgage spreads that are about one percent higher than U.S. government treasuries indicates borrower-friendly pricing," explained Anderson. "Plus, lending competition and a ripe multifamily market are providing unparalleled terms and conditions for borrowers."

Published: October 26, 2006

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Peter L. Mosca is president and founder of BAK Communications, Inc. He has over 22 years of communications and media consulting experience, serving a variety of nonprofit organizations, including the CCIM Institute and the REALTOR Association on all three levels – national, state and local. He is the Spokesperson Trainer for the CCIM's Jay Levine Academy and trains hundreds of residential REALTORS nationwide to be effective industry spokespeople. He is consistently ranked as "excellent" by about 90% of those who attend his presentations. While his principal consulting focuses are public speaking and media relations development and content delivery and management, Peter is also the host of the Voice America Network's weekly radio program, "Income Property Investment Talk," a one-hour program that brings the powerhouses of commercial and residential real estate to property investors every Wednesday at 11 a.m. EST. Peter is married 17 years to his wife Barbara. They have two children: Ashley, 15 and Kelli, 12. Hence, the name BAK Communications, Inc.