Industrial, Multifamily Find Mixed Results from Subprime Fallout

MBA (2/12/2008 ) Murray, Michael
Warehouse rents are dropping geographically and multifamily occupancies are rising—despite a drop in apartment property sales—based on economic realities stemming from the subprime crisis.

Luciana Suran, an economist at CBRE/Torto Wheaton Research, Boston, said cost increases for shipping goods to retail stores—gas prices, seaport labor and congestion—are causing companies to rethink the numbers and types of distribution centers as well as their ultimate locations.

Suran said companies have more incentive to increase smaller, regional distribution centers while cutting back on larger, consolidated centers. Many companies are moving their centers to inland areas with high rates of population growth to spread their risk and minimize chance of delays, she added.

However, 12 industrial markets tracked by TWR’s Warehouse Rent Index showed annual rent declines in areas of high foreclosure activity.

“Despite the benefits of decreased transport costs and a reduced risk of delays, locating warehouses near large, densely populated regions with growing consumer and retail activity has a downside, as many of these areas have been hardest-hit by the subprime crisis, at least in terms of foreclosure rates,” Suran said. “Past years' historically low interest rates and rising home prices allowed homeowners to increase their spending activity, but today's rising defaults have damped retail spending growth, slowing the rate at which new distribution space will be needed.”

On a positive note, Suran said the 12-market decline was one market less than in 2006 and despite slower growth in warehouse demand, fundamentals still remain healthy, and rents continue to grow in the majority of markets.

Current economic challenges are also having significant impact in apartment property sales, despite industry benefits from the downturn in single-family housing sales. “While the 'shadow' rental market—unsold houses and condos that have left the for-sale market to enter the rental market—may attract some apartment renters and potential renters, thus far, the lowest homeownership rate in five-and-a-half years seems to have increased demand for apartment residences,” said Mark Obrinsky, chief economist of the National Multi Housing Council.

According to NMHC’s quarterly survey, 80 percent of respondents said tightening mortgage credit reduced the outflow of renters into homeownership, up from 75 percent in October, More than 35 percent described the drop in outflow as “big,” up from 22 percent in October and 18 percent in July.

Debt financing conditions could also be stabilizing, according to NMHC’s Debt Financing Index, which increased to 45 percent from 17 percent in the third quarter. Nearly two-thirds of respondents said borrowing conditions were unchanged or worse, reflecting tightened underwriting standards and a dormant commercial mortgage-backed securities (CMBS) market.

According to the Mortgage Bankers Association's 4th Quarter Survey of Commercial/Multifamily Mortgage Bankers Originations released last week, commercial and multifamily mortgage banker loan originations fell by 16 percent over the same period last year. In the first half, commercial/multifamily mortgage bankers originated 38 percent more, in dollar volume, than they had been during the first half of 2006. By contrast, originations in the second half of the year ran 11 percent lower than the second half of 2006.
“When we saw the seizing up of the credit markets, it spread to the commercial mortgage-backed securities markets and we saw volumes start to ratchet down, so now we have very little movement in the origination side and the issuance side,” said Jamie Woodwell, senior director of commercial/multifamily research at MBA. “There have been exceptional activity of reprivatization that carried through the fourth quarter—a lot of portfolio sales.”

Nearly 30 percent of all respondents in NMHC's quarterly survey indicated borrowing conditions were better in the fourth quarter, up from 20 percent in the third quarter. “Overall, the apartment industry remains healthy at this point due to continuing strong fundamentals, and the fact that apartment firms did not overbuild in the latest economic cycle,” Obrinsky said.

However, despite strong fundamentals, the response to borrowing conditions represented the second lowest figure in survey history and, according to Obrinsky, “a testament to the uncertain environment stemming from the economic slowdown and the ongoing financial market crisis.”