Chuck Patenaude, senior vice president in charge of production with Minneapolis-based Dougherty Mortgage, remembers when he graduated from college: The goal was always to buy a house, be an owner and build equity.
Today? That’s not necessarily the case. Patenaude now looks at his three adult children. Two of them rent, largely because the cost of buying a home in their housing markets has grown so high. They’re saving money for a home, but they’re not ready to buy one yet.
And this isn’t an isolated incident. Young adults across the country are choosing to buy homes later in life. The U.S. Census Bureau reported that about one in every three Millennials under the age of 35 owned a home as of the end of 2018. That’s about 8 percentage points lower than the homeownership rates of previous generations from the ages of 25 to 34.
This is one reason – a big one – why demand for multifamily housing remains so strong, across the country and the Midwest. And it’s partially why commercial lenders such as Dougherty remain so busy: The financing requests for multifamily housing continue to come in.
“People just aren’t buying houses as quickly as they once did,” Patenaude said. “The whole American dream of owning a house has changed.”
And for older adults, the empty nesters? Many of them are moving out of single-family homes and choosing to rent, often in transit-oriented neighborhoods in the middle of cities.
“They are looking at their big houses and saying that they don’t need all that space,” Patenaude said. “People want freedom. They don’t want to spend all their time working on their houses. That’s been the trend for several years now. I don’t think that trend will slow down anytime soon.”
Patenaude isn’t alone. The numbers suggest that the multifamily market remains strong, and that demand for apartment living isn’t slowing.
As Patenaude looks across the country, he says that new apartment units in most markets still fill up quickly. Some markets might be suffering from a bit of overbuilding – markets like Washington D.C., New York City and even Nashville – but most continue to see exceptionally low vacancy rates in the multifamily sector.
Patenaude points to his home market of Minneapolis as a good example of today’s multifamily sector. Developers have added a significant number of new apartment units to the city and its surrounding neighborhoods. There is still building going on. Because of this new supply, monthly apartment rents probably won’t grow as quickly as they once did, Patenaude said. And vacancy might tick up slightly.
But on the whole? The Minneapolis multifamily market remains strong, and demand for new apartment units is still on the rise.
Nationally, the apartment sector remains strong, too. The National Association of Home Builders in its Aug. 22 Multifamily Market Survey said that the confidence in this sector among builders and developers rose in the second quarter of this year.
The association’s Multifamily Production Index jumped 16 points in the quarter to 56 when compared to the first quarter of this year. This index measures builder and developer sentiment about current conditions in the multifamily market on a scale of 0 to 100. A number above 50 means that more developers and builders are expressing confidence in the multifamily sector.
The survey’s Multifamily Vacancy Index also showed good news for the sector, falling eight points to 40. A number under 50 in this index indicates that property manager respondents are seeing vacancy rates falling. The association said that the index’s measure of 40 is its lowest since the second quarter of 2017.
This good news doesn’t mean that multifamily developers and builders aren’t facing some challenges.
“Overall, builders and developers are reporting increased confidence in the multifamily housing market,” said Gary Campbell, chairman of the National Association of Home Builder’s Multifamily Council. “However, they still have to deal with the high cost of land, labor and regulation, which could impact future production.”
Robert Dietz, chief economist for the association, said that despite any challenges, the survey’s numbers are good news for the multifamily sector.
“This is a sign of solid demand for multifamily housing in the second quarter, which was supported by low unemployment and a healthy number of household formations,” Dietz said.
Then there’s the news from the Mortgage Bankers Association’s Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations, which indicated that lending for most commercial sectors has been on the rise.
According to this report, commercial and multifamily loan originations were 10 percent higher in the second quarter compared to a year ago. These originations also rose 29 percent from the first quarter of 2019, according to the survey.
Jamie Woodwell, vice president of commercial real estate research for the bankers association, said that falling long-term interest rates and sustained strength in commercial real estate markets were behind the increase.
“With rates even lower during the third quarter, absent a major economic disruption, 2019 is shaping up to be another record year for commercial mortgage lending,” Woodwell said.
According to the association’s research, the second quarter saw a 151 percent year-over-year increase in the dollar volume of loans for health care properties, 23 percent increase for office properties, 16 percent increase for industrial and 15 percent increase for multifamily properties.
Patenaude said that business at Dougherty remains robust. When looking at financing requests, lenders here study carefully the location of the property, Patenaude said. Dougherty wants to know what is driving people to move to a certain area. Dougherty then looks at the overall credit of the deal and what its financial position will be in the transaction.
Finally, Dougherty looks at the sponsorship behind the deal. Who is the sponsor and how strong is that sponsor? What property management company is the sponsor going to use? How strong is that company?
If all the right boxes are checked, the deal can move forward, Patenaude said.
Are the financing requests coming to Dougherty strong? Most of them are, Patenaude said.
“I’d say that 60 percent to 65 percent of our requests are from sponsors who know what they are doing,” Patenaude said. “They provide us with the information we need. The remaining percentage? They throw it up against the wall and see if it works. But most of the requests we receive do come with the information we need to close a deal.”