Thanks to foreclosures, apartments now a hot property

Construction of multifamily units will lead the U.S. building industry again this year, allowing housing to contribute to growth for the first time in seven years, according to economists Michelle Meyer and Celia Chen.
Work will begin on about 260,000 apartment buildings and townhouse developments in 2012, up 45 percent from last year and the most since 2008, according to Meyer, a senior economist at Bank of America Corp. in New York. Chen, an economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, is even more optimistic, projecting a record 74 percent jump to 310,000.
Home ownership rates, which have declined to the lowest levels since 1998, may keep dropping as the foreclosure crisis turns more Americans into renters. In addition, household formation will probably accelerate as an improving economy and growing employment embolden more people to stop sharing residences and strike out on their own.
“Given the ongoing shift from owning to renting, there is increasing demand for multifamily construction,” Meyer said in an interview. “Foreclosures are transitioning people out of ownership.”
The projected increases in U.S. multifamily construction extend gains that began with a 6.8 percent increase in 2010 and a 54 percent surge last year to 178,300 units, according to figures from the Commerce Department. That portion of the market reached a record-low of 108,900 units in 2009 after declining for four consecutive years.
By contrast, starts on single-family homes fell last year to 428,600, the fewest in five decades of data. Bank of America’s Meyer projects single-family construction will grow 5 percent this year.
Federal Reserve Chairman Ben S. Bernanke last week highlighted the weakness in housing as limiting the economic expansion that began in June 2009.
Bernanke’s View
“The state of the housing sector has been a key impediment to a faster recovery,” Bernanke told the annual convention of homebuilders in Orlando, Florida, on Feb. 10. “Homebuilding remains depressed in most areas,” he said. “In contrast to the situation for owner-occupied homes, rental markets around the country have strengthened somewhat. Rents have been increasing and the construction of apartment buildings has picked up.”
A lack of investment in residential real estate subtracted 0.03 percentage point from economic growth last year, the smallest decline since the industry last expanded in 2005.
A report later this week may show housing starts opened the year on a positive note. Builders broke ground on 675,000 houses in January, up 2.7 percent from the prior month, according to the median forecast of economists surveyed by Bloomberg News before Commerce Department data on Feb. 16.
One reason why multifamily units may rebound faster than single-family houses is the drop in demand. The homeownership rate fell in the fourth quarter to 66 percent, according to Commerce Department data. It peaked at 69.2 percent in the second quarter of 2004 and fell to a 13-year low of 65.9 percent in the second quarter of 2011.
More Foreclosures
An increase in foreclosures may push the rate down even more. Lenders had slowed the pace of home seizures as they negotiated with attorneys general in all 50 states for more than a year over allegations of faulty and fraudulent paperwork used to repossess homes. That delayed the clearing of the market necessary to any recovery and increased demand for rental units.
The rental vacancy rate fell to 9.4 percent in the last three months of 2011 from 9.8 percent in the previous three months, according to data from the Census Bureau. It reached a nine-year low of 9.2 percent from April through June of last year.
Rental payments climbed 2.5 percent in 2011, the biggest gain since 2008, Labor Department figures showed.
Apartment real estate investment trusts such as AvalonBay Communities Inc. (AVB) have profited from the turn to rentals. It’s up 235 percent since its recession low on March 2, 2009, through Feb. 10. During the same period, the Standard & Poor’s 500 Index is up 92 percent.
Strengthening Demand
“Apartments should benefit once again in 2012 from a combination of gradually improving labor market, a weak for-sale market, favorable demographics and modest levels of new supply,” Tim Naughton, chief executive officer at AvalonBay, said on a Feb. 2 earnings call. “We expect that demand will outpace supply again this year, which would propel operating performance and result in another strong year for AvalonBay.”
The jobless rate dropped to 8.3 in January, the lowest level in three years, and employers in the world’s largest economy add 243,000 workers to payrolls, according to a Labor Department report this month.
The improvement will contribute to an increase in the number of households being formed, further stoking demand for rental housing, according to economists like Patrick Newport at IHS Global Insight in Lexington, Massachusetts.
“We will see a surge in household formation because of pent-up demand as people move away from their parents,” Newport said. “We will see a pickup in housing where there is a much stronger pickup in multifamily.”
IHS forecasts 1.5 million households will be formed in the 12 months through March 2013 from an estimated 972,000 in the year through March 2012.
–Bloomberg News–