Replacing older small apartment buildings may erode affordability
Small multifamily properties — which can be a key source of affordable rental units in many places — face an uncertain future, according to the latest Multifamily Market Commentary from Fannie Mae.
“Multifamily rental units can be found in high-rise structures or in garden-style buildings, but there are a number of properties that house between just five and 50 housing units,” explains Tanya Zahalak, senior multifamily economist in Fannie Mae’s Multifamily Economics and Market Research (MRG) Group.
“These properties are usually identified as small multifamily and can be found in many different metros across the country.”
The MRG report expects the nation’s multifamily housing stock to see an influx of properties with higher numbers of units. Since older small multifamily properties they are replacing frequently offer more affordable rents, that could upset affordability in many markets going forward.
“As older small multifamily rental properties age and/or fall into disrepair, they will likely be replaced with properties with more density per square foot,” the Fannie Mae commentary says.
“Developers will likely create more — but much smaller and more expensive – units on the same size lot.”
California Has More to Lose
Zahalak notes that small multifamily is a property type that can have a big impact in a lot of metros. But the impact of this trend will hit some parts of the country harder than others because the stock is unevenly distributed.
Estimates from CoStar and CreditFi put the number of small multifamily properties nationwide at between roughly 300,000 and 330,000. Those buildings provide an estimated 3.5 million to 4.4 million housing units.
However, according to CoStar, California accounts for nearly 99,000 of those properties — about one-third of the entire national supply. New York claims a 14 percent share, with 37,000 small properties, followed by Illinois and Florida, with some 14,000 properties each.
Delaware, Montana, New Hampshire, and Wyoming are at the bottom of the pack, each home to fewer than 500 small multifamily properties.
Counting by city, Los Angeles has the lion’s share by far with 51,100 properties with a whopping 637,500 units, according to CoStar estimates. Rounding out the top five are New York City (30,800), San Francisco-Oakland (15,100), Chicago (12,800), and San Diego (9,900).
Challenges Despite Brisk Lending
“Lending has been brisk for small multifamily,” notes Zahalak, with CreditFi estimating loan values as high as $120 billion last year. “All types of lenders are providing financing,” she says, “including private individuals and sellers.”
“But even though loan volume looks robust, there are some challenges around preservation of this type of property,” says Zahalak. “Construction is starting to slow, while properties have been getting larger. In fact, the average number of units per construction project as of the second quarter of 2016 was an estimated 117,” according to the Dodge Data & Analytics Construction Pipeline.
“Given the high land and construction costs in most metros, this trend of maximizing square footage in multifamily development, rehabilitation, and renovation should not be surprising,” says the MRG multifamily report.
“Unfortunately, it does have implications for the small multifamily segment, which in many places tends to offer more affordable rents when compared to newer properties.”
Opinions, analyses, estimates, forecasts, and other views of Fannie Mae’s Multifamily Economics and Market Research Group (MRG) included in these materials should not be construed as indicating Fannie Mae’s business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the MRG bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the MRG represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.