WASHINGTON — The flood of new apartments will put upward pressure on vacancy rates in the next two years, but the multifamily market should stay strong, according to a new Freddie Mac forecast.
More than 300,000 multifamily units were built and entered the market in 2015 — the most since 1989.
"Favorable demographic trends, strength in the job market and reduced affordability of owning a home will continue to fuel strong demand for multifamily rental units," according to Freddie's multifamily economic outlook for 2016 that was released Wednesday.
Such forecasts are being closely watched because lending to multifamily projects has become big business for banks in recent years, and the growth is an important component of the housing recovery. However, fears of a big fall usually accompany any rapid economic growth.
Federal regulators warned late last year that they are worried about credit and interest rate risk on apartment and other multifamily loans. They urged lenders to contain concentrations of commercial real estate on their books and to rein in their loosening underwriting standards.
Steve Guggenmos, vice president for multifamily research and modeling at Freddie, expects the construction of new units will remain elevated over the next few years.
"We see baseline demand being around 310,000 units per year, and if you add in pent-up demand that jumps up all the way to 450,000 units per year," he told reporters.
Vacancy rates rose slightly in the fourth quarter to 4.4%, according to the CRE research firm REIS. Guggenmos said he is not concerned because there is so much momentum in the multifamily market.
He predicts vacancy rates will reach 4.8% by the end of 2017, which still would be below the long-run average of 5.3%.
In 2015 the multifamily sector had strong annual revenue growth rate of 4.6% due to low vacancy rates and rising rents.
Guggenmos projects property revenue growth of 3.9% in 2016 and 4.3% in 2017. The long-run average is 3.3%.
The calculation of revenue growth is based on employment growth and the supply of new units coming on the market as well as other factors. "That gives us a robust view that on the ground the economics is stable," he said. "We do continue to see growth."
Lenders originated a record $256 billion in multifamily loans in 2015, according to the Mortgage Bankers Association. Freddie Mac purchased $47.3 billion in multifamily loans in 2015 and Fannie Mae purchased $42.3 billion in multifamily loans.