Market Insights on Community Development September 16, 2014 Fannie Mae Multifamily Outlook Kim Betancourt Fannie Mae Multifamily Mortgage Director of Economics and Multifamily Market Research Tanya Zahalak Fannie Mae Multifamily Mortgage Real Estate Economist Multifamily Market Research Mark Dean Citi Community Capital Managing Director, National Production Manager 1
Your Webinar Host Mark Dean, Citi Community Capital, National Production Manager Mr. Dean has over 27 years of experience providing investment banking and mortgage banking services to real estate developers and corporate sponsors. He specializes in financing multifamily housing using Private Activity Bonds, both enhanced and unenhanced, for public housing authorities, affordable housing developers, and senior housing providers. Mr. Dean works with both for-profit and not-for-profit organizations to finance projects such as affordable housing developments, senior living facilities, and market rate housing. Mr. Dean has provided acquisition, construction and permanent financing for a wide variety of multifamily housing, senior housing, not-for-profit facilities. In addition to these types of financing Mr. Dean has executed current, advance and taxable refundings of existing bond and real estate debt. His experience includes both public offerings and private placements. His broad range of experience with loan products and debt credit enhancements includes conventional financing vehicles as well as bond insurance, contingent loan agreements, FHA mortgage insurance programs, GNMA MBS, Fannie Mae MBS, letters of credit, and collateral pledges. In addition, Mr. Dean is an expert on the use of low-income housing tax credits to finance multifamily apartments. 2
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From Fannie Mae Kim Betancourt, Director of Economics and Multifamily Market Research Current Responsibilities: Kim Betancourt is Fannie Mae s Director of Economics and Multifamily Market Research. She manages a team of real estate economists that focus exclusively on the multifamily sector. Ms. Betancourt is responsible for analyzing current economic conditions at both national and local levels, determining their impact on the multifamily sector, and identifying future trends. Experience: Before joining Fannie Mae, Ms. Betancourt was a Senior Vice President at GMAC Institutional Advisors and managed the Realpoint senior analytical research team. Prior to GMAC, Ms. Betancourt was a Director in the Structured Finance department of Standard & Poor s and headed up the Servicer Evaluations Group. She has also held leadership positions with Citicorp and Midlantic National Bank. Education: Ms. Betancourt holds both a Master of Arts and a Bachelor of Arts with honors from Rutgers University. 3
From Fannie Mae Tatyana (Tanya) Zahalak, Real Estate Economist Current Responsibilities: Tanya Zahalak is a real estate economist focusing on the multifamily sector. She follows multifamily markets at the MSA level with an eye toward determining multifamily market trends and supply/demand imbalances. In addition, Ms. Zahalak is the Multifamily Mortgage Business affordable housing economist. In this capacity, she is responsible for analyzing economic conditions at both national and local levels and determining their impact on multifamily subsidized affordable housing. Publications include Despite an Increase in Supply, Fewer Affordable Rentals and Is the Development and Design of Multifamily Housing in Line with Recent Trends. Experience: Ms. Zahalak has been with Fannie Mae for over 15 years in a variety of roles and has experience in both single and multifamily housing including pricing and product development. Education: Ms. Zahalak received a B.A. in Applied Math from Washington University in St. Louis and a Masters in Finance from Johns Hopkins University. 4
Multifamily Market Outlook Kim Betancourt Tanya Zahalak Multifamily Economics and Market Research Multifamily Mortgage Business September 2014 6
Source: The New Yorker 7
Real Estate Fundamentals: Demographics Favorable Demographics are in Multifamily s favor over the long-term, especially in the younger aged cohort U.S. Renter Population: Age 20-34 Cohort Millions 70 68 66 64 62 60 58 56 Source: U.S. Census, Fannie Mae 8
Real Estate Fundamentals: Demographics Favorable and even though there are more 1-4 unit rentals than 5+ unit rentals... U.S. Renter Occupied Stock by Structure Distribution of Renter Occupied Stock (%) 30 25 20 15 10 5 0 25.9 28.5 24.2 19.7 18.3 22.3 11.1 11.6 5.7 6.3 8.5 8.4 4.9 4.6 1, detached 1, attached 2-4 5-19 20-49 50+ Other* 2007 2008 2009 2010 2011 2012 Source: Census Bureau * Other includes manufactured/mobile homes, boats, RVs, vans etc. 9
Real Estate Fundamentals: Demographics Favorable renters aged 35-64 prefer single family dwellings and younger renters prefer multifamily dwellings. Share of Total Renters Share of Multifamily Renters 60% 40% 20% Age 65+ Age < 35 Age 35-64 0% 0% 20% 40% 60% 60% 50% 40% 30% 20% 10% 0% Age<35 Age 35-64 Age 65+ Share of Single Family Renters (1-4 units) *Dot width is proportionate to number of renters represented by each age group Sources: 2012 American Community Survey 10
Real Estate Fundamentals: Employment Growth Positive Many metros will keep seeing job growth, although at a slower pace over the next two years. Change in Employment Select Metros Source: CBRE-EA, 2Q2014 11
Real Estate Fundamentals: Rental Demand Stable National estimated multifamily vacancy rates are at their trough Estimated National Rent Level and Vacancy Rate $1,120 $1,070 Rent Level Vacancy Rate $1,123 9.0% 8.0% 7.0% $1,020 6.0% 5.0% $970 4.75% 4.0% $920 3.0% Source: Fannie Mae Multifamily Economics and Market Research Estimates 12
Real Estate Fundamentals: Rental Demand Stable keeping rent growth positive for nearly four years now 1,000 2.5% 2.0% 500 1.5% New Jobs 0 (500) Job Growth Rent Growth 1.0% 0.5% 0.0% -0.5% Quarterly Rent Growth (1,000) -1.0% -1.5% (1,500) -2.0% Source: CBRE-EA Recessionary quarters shaded in yellow. 13
Real Estate Fundamentals: Rental Demand Stable with many metro-level vacancies expected to remain below their historic averages. Source: CBRE-EA, 2Q2014 14
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Real Estate Fundamentals: Rental Demand Stable Most younger renters still want to own a home -- at least someday Source: Fannie Mae National Housing Survey, May 2014 16
Real Estate Fundamentals: Rental Demand Stable and believe homeownership is a good financial investment. Source: Fannie Mae National Housing Survey, May 2014 17
Real Estate Fundamentals: Rental Demand Stable Nevertheless, it seems that many tenants plan to keep renting Share of respondents who say they would if they were going to move Source: Fannie Mae National Housing Survey, August 2014 18
Real Estate Fundamentals: Rental Demand Stable even though they are anticipating rent increases higher than forecasted... Average 12 Month Rental Price Change Expectation (Percent) Source: Fannie Mae National Housing Survey, August 2014 19
Real Estate Fundamentals: Rental Demand Stable and expect rental prices to keep rising over the next 12 months. Share of respondents who say home rental prices will in the next 12 months Source: Fannie Mae National Housing Survey, August 2014 20
We decided to convert it into high-density housing. Source: The New Yorker 21
Real Estate Fundamentals: Rental Supply and Demand Multifamily starts are slightly ahead of historically average levels 1,200 Multifamily (5+ units) Starts (3 month moving average) 1,000 800 (000s) 600 400 200 1989 2008 Average 0 Source: U.S. Department of Commerce, Bureau of the Census, per Haver Analytics DLX 22
Real Estate Fundamentals: Rental Supply and Demand with the number of multifamily projects underway rising quickly National Condo and Apartment Completions and Units Underway Thousands 120 100 80 Apartments Condos 60 40 20 0 Source: CBRE-EA/Dodge Pipeline, July 2014 * Anticipated completion date NOTE: Pipeline data is not an actual forecast of activity, it is a monitor of activity reported on to-date. As more projects are planned and tracked, figures in future periods might go up. 23
Real Estate Fundamentals: Rental Supply and Demand but there are really only a few metros that have a significant number of completions coming online soon. Units (Thousands) 45 40 35 30 25 Multifamily Apartment Units Underway Select Metros Expected Year of Completion Beyond 2015 2014 20 15 10 5 0 Source: CBRE-EA/Dodge Pipeline, July 2014 Metros with 2,000 or more units underway NOTE: Pipeline data is not an actual forecast of activity, it is a monitor of activity reported on to-date. As more projects are planned and tracked, figures in future periods might go up. 24
Real Estate Fundamentals: Multifamily Investment Cap rate spreads have stayed wide... 8.0% 7.0% 6.0% 5.0% 4.0% Treasurys and Multifamily Cap Rates 3.0% 2.0% 1.0% 10-Year Treasury Cap Rate 0.0% Source: Real Capital Analytics, and Federal Reserve, Selected Interest Rates H.15, per Haver Analytics DLX 25
Real Estate Fundamentals: Multifamily Investment as investors have increasingly turned to buying existing apartment buildings. National Apartment Sales Volume and Cap Rates Billions $35 $30 Sales Cap Rate $26.0 B 7.5% 7.3% 7.1% $25 6.9% $20 $15 6.7% 6.5% 6.3% $10 $5 $0 6.0% 6.1% 5.9% 5.7% 5.5% Source: Real Capital Analytics Note: Chart excludes $22 B Tishman-Speyer transaction in October 2007 26
Source: The New Yorker 27
Multifamily Affordable Housing: Affordability Still a Concern The number of units affordable to Very Low Income renters declined by 200,000 units to 6.3 million in 2011. Relative Proportion of Affordable Multifamily Housing 2011 vs. 2009 90% 80% 70% 60% 50% 40% 30% 20% 10% 2009 2011 16.4% 15.4% 42.8% 39.3% 62.5% 59.6% 0% Extremely Low Income Renters (Income<=30% of AMI) Very Low Income (Income<=50% AMI) Affordable at 60% of AMI Source: Fannie Mae, 2011 American Housing Survey Based on cumulative affordable units. For instance, if a unit is affordable at Extremely Low Income i.e. affordable to income <= 30% of AMI, it is also affordable at the Very Low Income (<= 50% of AMI) category. 28
Multifamily Affordable Housing: Affordability Still a Concern As a result, working renter households are more likely to be severely cost-burdened compared to homeowners. 30% Percentage of Working Households with a Severe Housing Cost Burden 25% 24.5% 25.6% 26.4% 25.4% Working Renters 20% 21.2% 21.6% 20.9% Working Owners 18.6% 15% 2009 2010 2011 2012 Source: Housing Landscape 2014, Center for Housing Policy 29
Source: Cartoon Stock 30
Multifamily Affordable Housing: Little New Affordable Stock There has been hardly any class B/C multifamily new construction over the past decade 160,000 140,000 120,000 Multifamily Completions by Class Type Class A Class B/C 100,000 80,000 60,000 40,000 20,000 0 Source: Reis 31
Multifamily Affordable Housing: Little New Affordable Stock with the share of Class B/C units shrinking steadily. Multifamily Inventory Share by Class Type 100% = 8.8 M 9.0 M 9.1 M 9.2 M 9.3 M 9.2 M 9.2 M 9.3 M 9.3 M 9.4 M 9.6 M 9.7 M 9.8 M 9.9 M 100% 90% 80% 70% 60% 50% 65% 64% 63% 63% 62% 62% 62% 61% 60% 60% 59% 59% 58% 58% 40% 30% 20% 35% 36% 37% 37% 38% 38% 38% 39% 40% 40% 41% 41% 42% 42% 10% 0% Class B/C Source: Reis, based on multifamily sample tracked Class A 32
Multifamily Affordable Housing: Little New Affordable Stock Also, the number of LIHTC units placed in service has declined since 2005. Low Income Housing Tax Credit Units (LIHTC) Projects placed in Service since 1987 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 LIHTC Units Placed in Service Source: HUD Low Income Tax Credit Database as of October 1987-2010; Integratec estimates based on HFA allocations 2011-2014 LIHTC Properties Placed in Service * Integratec assumed 15% of the current year allocations, 60% of the prior year allocations and 25% of two years prior allocations would be placed in service. For example, 2014 reflects 15% of the 2014 allocations, 60% of the 2013 allocations, and 25% of the 2012 allocations. 33
Real Estate Fundamentals: Rental Demand Stable Coupled with steady rent growth by class 4.5% National Effective Rent Growth by Class Class B Class C % Increase from Prior Year 4.0% 3.5% 3.0% 2.5% 2.0% Source: Axiometrics 34
Low Income Housing Tax Credit Properties: Favorable Fundamentals vacancies for affordable housing have been consistently lower than market rate housing recently 5.5% Vacancy Rates for Market Rate and Affordable Properties 6/30/2012 12/31/2013 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% LIHTC Properties Market Rate Class B/C Source: Integratec Tax Credit Central, REIS 35
Low Income Housing Tax Credit Properties: Favorable Fundamentals with occupancy rates for new subsidized units consistently highest. Occupancy Rates by Development Type 6/30/2012 12/31/2013 Median Expense Per Unit ($) Q2 2012 Q4 2013 Source: Integratec Tax Credit Central 36
Low Income Housing Tax Credit Properties: Favorable Fundamentals Meanwhile, LIHTC vacancies continue to be low in most major metros Median Vacancy Rate Trends for LIHTC Properties Select Metros Vacancy Rates (%) 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% Seattle, WA San Francisco, CA Los Angeles, CA Baltimore, MD Boston, MA Minneapolis, MN New York, NY Washington, DC National Average Chicago, IL Philadelphia, PA Detroit, MI Houston, TX Dallas, TX St. Louis, MO Atlanta, GA 12/31/2012 12/31/2013 Source: Integratec, Tax Credit Central 37
Low Income Housing Tax Credit Properties: Favorable Fundamentals with debt service coverage ratios solid Debt Service Coverage Ratio 0.60 0.80 1.00 1.20 1.40 1.60 1.80 New York, NY Baltimore, MD Los Angeles, CA Washington, DC San Francisco, CA Minneapolis, MN Philadelphia, PA National DCR Chicago, IL Seattle, WA Dallas, TX Houston, TX Boston, MA St. Louis, MO Detroit, MI Atlanta, GA 12/31/2012 12/31/2013 Source: Integratec, Tax Credit Central 38
Low Income Housing Tax Credit Properties: Favorable Fundamentals and operating expenses rising modestly $10,000 $9,000 $8,000 Median Expense Per Unit ($) for Major Metropolitan Statistical Areas 12/31/2012 12/31/2013 $7,000 $6,000 $5,000 $4,000 $3,000 Source: Integratec, Tax Credit Central 39
Low Income Housing Tax Credit Properties: Favorable Fundamentals and although operating expenses are rising nationally. Median Expense Per Unit ($) Q2 2012 Q4 2013 Source: Integratec Tax Credit Central 40
Low Income Housing Tax Credit Properties: Favorable Fundamentals real estate taxes have mostly stayed flat year-over-year. $900 $800 $700 Median Real Estate Taxes Per Unit ($) for Major Metropolitan Statistical Areas 12/31/2012 12/31/2013 $600 $500 $400 $300 $200 $100 $0 Source: Integratec Tax Credit Central 41
And just remember: Thank You! Kim Betancourt, Director of Economics Tanya Zahalak, Real Estate Economist Multifamily Economics and Market Research Kim_Betancourt@fanniemae.com Tatyana_M_Zahalak@fanniemae.com Twitter: @Kim_Betancourt 42
Appendix: Tax Credit Central 43
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