Keep an eye on multifamily housing starts – Moody's

Report warns of slowdown's impact on housing affordability

Keep an eye on multifamily housing starts – Moody's

The commercial real estate (CRE) market should keep an eye on slowing multifamily housing starts and their impact on housing affordability and migration patterns, Moody’s Analytics said in a recent report.

“The macroeconomy is in a relatively healthy state, a benefit for CRE largely, which has also shifted expectations of an optimistic three rate cuts to more likely one or two in 2024,” the report read. “However, signs of a softening economy are showing.

“The industry is, on the one hand, benefiting from a moderate economy, particularly in multifamily, as employment remains robust. On the other hand, the period of ‘higher for longer’ interest rates are applying significant pressure on the financial market side of the industry. In summary, Q2 data reflects a period of continued stability in most sectors despite ample vulnerability should things sour in the broader economy.”

Effective multifamily rents grew by 0.3% while the vacancy rate remained flat at 5.7%. Year-over-year, effective rents have declined by 1.1%, providing some relief after an inflationary period during the pandemic, though they are still up 19.9% since Q4 2019.

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National multifamily vacancy was flat at 5.7% over the first half of 2024 – 50 basis points above the same time last year.

The report noted demand has been slowly but steadily catching up to increased new supply.

“New supply continued to trickle in and readjust the market balance or even help ease some of the housing shortages,” Moody’s wrote. “Excessive supply – measured by the total completion minus net absorption on a rolling 12-month basis – trended slightly downwards over the past two quarters after peaking at the year-end of 2023. Rising vacancy tapered off, allowing some room for slight performance gain.”

The trajectory of interest rates remains a key factor for the CRE market in the remainder of 2024. The report suggested that clarity on the timing of rate cuts and the equilibrium rate could stimulate transactions and lending activity. However, loan maturity and credit risks continued to pose challenges for owners and investors.

“Beneath the surface, headwinds and metro nuances remained. It is especially important to monitor the slowing multifamily starts and its enduring impact on housing affordability and migration patterns, agglomeration of commercial activities following demographic changes and population trends, tightened consumer financial buffers and therefore shifts in consumer spending and inventory management,” the report said.

“It can take more than just the individual owner or investor to make the best out of the commercial space, and the CRE sector is in dire need of federal and local policy support to reimagine or repurpose underutilized space in today’s market.”   

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