from the St Louis Fed

Out of all major commercial real estate categories, the multifamily market has strengthened the most since the last recession. Is a bubble brewing?

And how does the Eighth Federal Reserve District¹ compare with the nation? An article in The Regional Economist explored these questions.

Regional Economist Charles Gascon and Senior Research Associate Joseph McGillicuddy noted that multifamily rents have been growing about 3 to 4 percent per year since 2012, much faster than general prices. They also noted that this growth seems to be fueled by both an increase in demand and a decrease in supply.

More Demand for Multifamily Housing

The authors noted that demand for renting increased in the wake of the most recent recession due to foreclosures, poorer job prospects and tighter mortgage lending standards. Other factors include younger households waiting longer to buy houses and baby boomers being more willing to rent as they get older.

Less Supply for Multifamily Housing

Gascon and McGillicuddy also pointed out that construction activity fell during the recession, due both to builders closing up shop and to lenders extending less credit. “So, as demand began to experience significant growth, there was a severe fall in new units entering the market, leading to a large gap between demand and supply,” they wrote.

Bubble in the Market?

The authors noted that strong growth in property prices and lending activity may be warning signs of a bubble in the multifamily housing market. However, they also noted that demand growth may slow to a more sustainable level once the homeownership rate stabilizes.

Although it may slow down, demand shouldn’t experience a sharp drop, as Gascon and McGillicuddy showed that other demand drivers remain strong: