Despite all the talk about "condo mania" over the past several years, the multifamily housing market remains in better condition than the single-family housing market. And with single-family housing continuing its sharp decline in 2007, multifamily housing may offer a small ray of hope for hungry residential furniture manufacturers. Single-family housing starts slipped 15 percent in 2006 and will fall by a similar amount this year. Multifamily housing is also on the decline, but last year's starts dipped only 5 percent and this year's are expected to drop just 10 percent for a much more moderate downturn than in the single-family market.

Two elements are keeping the multifamily housing market at a healthier level of activity than the single-family side of the marketplace. First, condos can be a fallback, or a less expensive option, for households that would like to buy into the homeowners' market, but are being priced out by higher mortgage rates and stiffer lending criteria. Second is the fact that multifamily housing is not monolithic, but rather has two masters: owners and renters. So, while the condo market may ebb over the next several years, rental apartments may be able to take up some of the slack.

Neither of these factors will keep the multifamily housing market from declining over the next year, but they will help mitigate that decline.

Condo sales see milder decline

Existing home sales data from the National Assn. of Realtors (NAR) reveals that condo sales reached a peak in 2005 at 896,000 units. In 2006, sales declined 11 percent to 801,000 units. This level of activity was not only below 2005 sales, but was also lower than 2004 sales of 820,000 units. Across the four regions, 2006 declines were largely in the double-digits: sales fell 10 percent in the Northeast, 13 percent in the South and 14 percent in the West, but registered a more modest 5 percent decline in the Midwest. Fortunately, the worst declines may now be over. Monthly sales seem to have reached a low point in October 2006 at an annual rate of 752,000 units. Sales rose to 768,000 units by December and remained above that level through the first five months of 2007.

Although another decline in annual condo sales is likely in 2007, the rate of decline is expected to soften. In the first five months of the year, starts were just 6 percent lower than a year earlier and for the year as a whole, condo sales are likely to average 789,000, or just 1 percent below their 2006 level. The year looks a bit more mixed since some regions seem to be closer to reaching the bottom than others. In the first five months of 2007, sales remained down sharply in the South (-14 percent) and the West (-15 percent), but were down more modestly (-7 percent) in the Midwest and were flat in the Northeast.

Mixed conditions for rental market

Because the economy and employment continue to grow in 2007, the market for rental apartments remains generally positive given that jobs and their income are the primary drivers of rental demand. But this year's slower job growth could limit the rate of absorption for rental apartments, which would dampen new development. In addition, there is evidence that a fair number of condos sold to investors in 2005 and 2006 (who intended to quickly "flip" them, but were instead caught by the sudden change in market conditions) may be rented over the next several years until the demand for condos improves once again. This unexpected or "shadow" supply of rental units could serve to increase vacancy rates, soften rent increases and reduce the demand for additional construction over the next few years.

Even with these less-than-favorable conditions, however, the relatively stable revenue stream and lower vacancy rates for rental apartments compared to other income property types (retail, hotel, warehouse and office markets) will ensure that rental housing continues to be viewed favorably by the real estate finance community. So, while levels of multifamily housing development will dip, starts will stay at a relatively healthy level in 2007 and beyond. Though the trend remains down, we are beginning to see light at the end of the tunnel.

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