December 14th, 2008 10:07 AM

... First, the bad news. Vacancy rates are climbing in many markets and rent growth has slowed as the economy weakens. Job growth drives apartment demand, and we all know what's happened to job growth. Fewer jobs causes renters to double up with roommates, or move in with parents, friends or relatives, and that puts pressure on occupancy. In addition, the "shadow" rental market is increasing as foreclosed homes and failed condominium conversion projects are being added back into rental housing stock. This latter problem of failed condo projects is particularly acute in Florida. Reasonable people can dispute the true effect of the so-called "shadow" market on apartments, but it's true that the combination of increased supply and slower demand will reduce prices (rents).

This is all occurring against the backdrop of increasing capitalization rates, which is a yield/valuation metric in commercial real estate. "Cap" rates are just like bond yields, as they move up, par value goes down. Consequently, as cap rates move up in many markets, asset values are declining. ... If things don't go right, more highly levered players could be forced to sell assets in order to reduce leverage.

In terms of good news however, ... apartment assets continue to perform very well relative to other commercial real estate, and low multifamily loan delinquencies reflect that. Underscoring this thesis was a report out from the Mortgage Bankers Association this week showing that the 30-plus-day delinquency delinquency rate for multifamily assets held in commercial mortgage-backed securities (CMBS) was still below 1%. Delinquencies did tick up, although only slightly (by 0.10 percentage points to 0.63 percent).

... “Commercial/multifamily mortgages have not seen the same kind of deterioration in performance witnessed among other real estate loans, and at the end of the third quarter, delinquency rates for every investor group remained at the lower end of their historical ranges,” said Jamie Woodwell, MBA's vice president of commercial real estate research.

Fortunately, despite the meltdown in the capital markets and the takeover by the federal government (and perhaps even because of it), Fannie Mae and Freddie Mac are still providing plentiful debt financing for the apartment industry, and they are doing it in such a way as to move final maturities out into years where there will be less pressure from other CRE maturities/refinancings. If you can show (prove) 1.25x debt coverage at no more than 80% loan to value, Fannie Mae will happily write you a loan. ...

The case for multifamily is simple. For many years in the earlier part of this decade, the easy credit environment increased the homeownership rate at the expense of rental housing. Now the easy credit years are over, and those folks who could once qualify for a single family mortgage simply by having a pulse will no longer be able to do so. Moreover, the economy will not be in the tank forever, and job growth will eventually return. These dynamics are causing some industry observers, including the National Multi Housing Council to go so far as to predict a shortage of rental housing as early as 2011.