Multi-Family REITs Stand Strong Against Property Fundamental Headwinds

By Steven Marks, Managing Director & Head of U.S. REITs, Fitch Ratings

As property fundamentals bottom out, signs of visible recovery are now in place for multi-family REITs, along with solid liquidity and capital markets access. This is precipitating a stable outlook for multi-family REITs through next year.

The downward grind of negative same-store net operating income growth and occupancy declines is almost over. And with the single-family housing and condo construction boom at a standstill in Sunbelt markets like Phoenix, Southern California, and South Florida, supply will not be a major obstacle to the recovery of sector fundamentals.

Multi-family vacancies will likely peak at 8.6 percent in the second half of this year before beginning a gradual decline to approximately 6.5 percent by 2014, which paves the way for improved net operating income, particularly for markets such as San Francisco, Washington, D.C., and Boston.

Though new rent spreads remain negative, they are tightening across all multi-family REITs. Renewal rents are also higher, which is indicative of the precursors of landlord pricing power.

Multi-family REITs now have access to numerous capital sources, thanks largely to the opening of the unsecured bond markets. Another benefit is their ability to raise capital by issuing equity, and access to available unsecured revolving bank loans and mortgage funding from Fannie Mae and Freddie Mac.

These various stronger elements are offset to some extent to still-elevated leverage among multi-family REITs, which remain among the more highly leveraged REIT property types on a historical basis.

Nonetheless, multi-family REITs’ access to a variety of sources of capital, positive signs of an economic recovery, the short-term nature of leases, and the relatively low volatility of the property type should bode well for the multi-family sector through the recovery period.

Additional information is available in Fitch’s mid-year outlook report for U.S. REITs, “Steadying the Ship”, which is available at www.fitchratings.com.