There’s been a fair amount of discussion in multifamily circles about multifamily starts and what effects difficult financing and the contracting economy will have in the near and long term. 

Through October starts had maintained very near historic norms, though several gurus in the multifamily world are predicted near term declines.  A couple of the seasoned experts predicting declines in the near term are Ron Witten, founder of Witten Advisors, and Dave Seiders, the chief economist for the NAHB. 

Witten in particular is predicting that by 2011 multifamily starts will fall to somewhere in the neighborhood of 125,000 units nationally – impressive in that those numbers were last seen around 1993.  Witten and Seiders opine that starts will decline for a least the next three years, reaching a nadir in 2011. 

Why the gloom in the projections?  Three issues come to mind.  First, financing development projects is taking a lot more capital these days – somewhere in the range of 35 to 45 percent – quite a bit more than the 25 percent requirements during the frenzy just a few years ago. 

Secondly in many markets occupancies have been softening as newly delivered units aren’t being absorbed as quickly (see our Texas market comments from a few days ago), and some markets have very stiff shadow market competition as well.  Witten doesn’t think there will be much change in terms of the excess inventory during 2009, but opines (hopes) that 2010 will be better. 

Finally, we hear increasing concern about the dismal state of the economy – the contraction appears to be accelerating this quarter and last, and job losses / lean times historically negatively impact apartment operations, though more so in higher end units as opposed to working class units.  

Why do we think it smells like long term opportunity?  Two reasons right off the bat.  One, as delivery of new units slows down, and the new units are absorbed (at rates unique to each and every market), markets will eventually tighten, raising occupancy and value as the process rolls on. 

Another reason we see very strong opportunity over the next several years, particularly with regard to our target “working class” apartments, is that the economic and financial woes the nation is facing are not going to go away overnight.  In fact, if our new President Elect puts into place some of the tax and redistributive policies that he proposed during the campaign, the economy will likely sink deeper into the hole before things get better.  Buying a home isn’t going to get any easier over the next year or two, in fact, likely just the opposite, and folks need to live somewhere. 

If you’re a Class A multifamily investor, pending your markets of interest you might have something to worry about; if you’re a Class B or C+ investor in a strong market today, the future looks a lot better.  The health and vitality of your investment market matter more than ever today. 

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