As the federal REO-to-rental program begins its pilot phase, multifamily owners are anxious to see how it might affect their business.
The shadow market has always been an elusive X-factor in the apartment world. It’s a notoriously difficult part of the rental market to quantify. But now that the shadow market has its own government stimulus program—and with about 250,000 for-sale homes languishing on the agencies’ books—apartment owners are growing a little apprehensive.
Many of the program’s details remain to be seen, but the impact on national vacancy rates is expected to be minimal. Still, real estate is a local business. And in the hardest-hit markets still suffering from a glut of distressed for-sale housing, the program will certainly be a competitive factor for the multifamily industry.
“If all of a sudden, the inventory of for-rent single-family homes goes way up, that’s going to be competitive pressure for apartments in a number of markets,” says Hessam Nadji, managing director of research at Encino, Calif.–based Marcus & Millichap. “But I don’t think it’s a big enough factor to change the macro-dynamics.”
The program has the potential to make life harder for apartment owners in markets suffering from an overbuilt single-family sector. After all, the highest concentration of distressed for-sale housing is often found in markets that aren’t doing that well in the rental arena, either. For the most part, though, the demographics of who rents a single-family home isn’t expected to threaten the professionally managed apartment market all that much.
“There are only a few places where the shadow market is impacting the apartment sector enough that you can really feel it … most of Florida, Atlanta, Phoenix, Vegas, and the Inland Empire,” says Greg Willett, vice president of research at Carrollton, Texas–based MPF Research. “Even in those metros, substitution from multifamily to single-family rentals isn’t as pronounced as many might think, since the core audience for apartments is single-person households, and the core audience for single-family homes is families with children.”
The pilot program will soon begin with Fannie Mae offering pools of various types of assets, including homes already being rented, vacant properties, and nonperforming loans. Assets on Freddie Mac’s books, as well as the Federal Housing Administration's, are expected to follow. And while Freddie Mac is working on a new commercial mortgage product for the program, Fannie Mae has no such plans at present.
“As it relates to the financing of these ventures, Freddie is doing some really innovative stuff and I tip my hat off to them,” says Jeff Hayward, executive vice president of multifamily for Washington, D.C.-based Fannie Mae. “If the regulator asked us to do more, we will do more.”
Until the pilot program proves itself, it’s difficult to gauge its impact. How many properties will be involved? How long will these properties have to stay as rentals? And, ultimately, is the program just another way to kick the can down the road, only serving to delay the need for the single-family market to take its medicine?
“The percentage of investors continues to go up as a component of total home buyers. Now, we’re talking about institutionalizing the process,” says Nadji. “So what happens in two or three years when home prices improve and these investors want out? There’s going to be a flood of these homes thrown into the market.”