Freddie Mac issued a company record $72.8 billion of multifamily securities in 2018, which were designed to move risk to private investors from taxpayers.

“With our diverse array of securities, including our flagship K Deals, we continue pioneering efforts to meet

[caption id="attachment_7455" align="alignright" width="300"] Debby Jenkins[/caption]

private sector demand for investment products while shifting risk away from taxpayers,” said Debby Jenkins, executive vice president and head of Freddie Mac Multifamily. “As we look to the future, we’re going to continue pushing for more innovations that can lower capital cost for borrowers, making rental housing more affordable.”

Contributing to the $72.8 billion total securitization, the company settled:

• $61.6 billion in K Deals, which feature stable cash flows and a structured credit enhancement and include guaranteed senior and interest only classes.
• $7.0 billion in SB Deals, which guarantees senior classes of securities issued by third-party trusts and backed by Multifamily Small Balance Loans.

And $4.2 billion split among the following types of deals:

• KT Certificates which are backed by multifamily mortgage loans that will be sold into K-Series securitizations and transfer a portion of the risk associated with the loans.
• Multifamily PCs which are secured by structures with five or more units designed for residential use, with terms ranging from five to 30 years.
• Q Certificates which are structured pass-through securities backed by multifamily mortgage loans and backed by an underlying trust that holds multifamily mortgage loans that weren’t underwritten or purchased by Freddie Mac prior to securitization.
• M Certificates which are guaranteed tax-exempt and taxable securities supported by pools of un-enhanced tax-exempt and taxable multifamily housing collateral and,
• ML Certificates which are a new, more efficient and cost-effective alternative to financing stabilized affordable multifamily properties with 4% Low-Income Housing Tax Credits.

Freddie Mac Multifamily’s securitization program moves the vast majority of risk away from the company and taxpayers to private investors. The Federal Housing Finance Agency’s second quarter 2018 Credit Risk Transfer Progress Report found that through the first half of 2018, Freddie Mac has transferred 86 percent of its multifamily credit risk.

Security Properties and Tokyu Land US Corp., purchased Sanctuary, an apartment building located in Portland, Ore., for $58,300,000. Built in multiple phases, the $1.9 billion South Waterfront community is one of the largest urban redevelopment projects in the nation.

Sanctuary has 182 units and is located along the Willamette River on the southern end of Portland, Oregon. Given Sanctuary's proximity to downtown Portland as well as public transportation, residents can commute to all the key employers in the, including Under Armour, Portland State University as well as Google, Oracle, and Jama Software.

“Our asset is well positioned for growth and we look forward to unlocking value for our investors with this core acquisition,” said Davis Vaughn, senior director of investments at Security Properties. "Sanctuary has an irreplaceable location along the river that will give it a permanent competitive advantage.”

"We identified Portland as a growth market for us earlier in 2018,” said Nobuhide Kashiwagi, president of Tokyu Land US. “This asset is a great addition to our growing multifamily portfolio, and we are looking forward to continuing our acquisitions in the Pacific Northwest. Sanctuary's superior location provide us with a stable foothold upon which to grow."

The apartment vacancy rate was flat in the quarter at 4.8 percent. At year-end 2017 it was 4.6 percent, while at year-end 2016 it was 4.2 percent.

Both the national average asking rent and effective rent, which nets out landlord concessions, increased 0.8% in the fourth quarter. At $1,440 per unit, market rent and $1,370 per unit, effective rent, the average rents have increased 4.9 percent and 4.6 percent, respectively, from the fourth quarter of 2017.

Net absorption was 39,732 units, lower than the previous quarter’s absorption of 50,502 units and below the average quarterly absorption of 2017 of 46,926 units. Construction was 49,944 units, also below the third quarter’s 62,313 units and below the 2017 quarterly average of 61,869 units.

Although 40 metros saw a vacancy rate increase in the quarter, the increase was due to high construction that exceeded net absorption, or occupancy growth. Metros with the highest vacancy rate increase include Albuquerque, Lexington, Nashville, Charleston and Denver.

A deeper look into the net absorption numbers shows that metros with the highest net absorption have had some of the highest job growth in 2018: Houston, Dallas, Denver, Seattle, Orlando, Austin and Phoenix, all of which have had job growth of 2.8 percent or more over the year. Atlanta and Philadelphia also had strong net absorption growth with job growth of 2 percent and 1.4 percent, respectively.

Rent growth was more consistent with occupancy growth as 25 metros saw an increase in effective rent of 1.0% or more led by Albuquerque, Charlotte, Philadelphia, Phoenix and Atlanta that saw effective rent growth of 1.8 percent to 2.1 percent in the fourth quarter. Only three metros posted an effective rent decline: Hartford, San Francisco and Syracuse.

At $2,995 per unit, San Francisco still has the second highest rent in the U.S behind New York City at $3,530 per unit. New York’s effective rent grew 0.5% in the quarter, but it has grown 3.1% over the year, ranking it in the bottom 25% nationally. San Francisco’s effective rent growth for the year was 2.8%. Metros that posted the highest effective rent growth for the year include Phoenix (8.4 percent), Las Vegas (8.1 percent), Atlanta (7.5 percent), Denver (+7.0%) and Charleston (6.8 percent). Markets with the weakest growth include Fairfield County (0.7 percent), Hartford (1.6 percent), Tulsa (1.7 percent), Lexington (1.8 percent) and Columbia (2 percent)

Job growth continues to fuel demand for apartments. The U.S. added an average of 206,000 jobs per month through November of this year, up from an average increase of 183,000 jobs in the same period of 2017. Growth in the metro areas tracked by Reis, however, was 1.8% year-over-year, higher than the national growth of 1.6%.

Apartment construction started to accelerate in 2017 and 2018. This had raised concerns that the apartment market consistently, apartment occupancy growth has nearly kept demand for apartments has been robust throughout 2018. Not only has job growth supported apartment demand, but the weaker housing market has also benefitted the apartment market.

Existing home sales climbed in October and November but had fallen in eight of the previous ten months and is down 7- percent from a year ago. Although mortgage rates have fallen over the last few weeks pushing applications up a bit, the housing market could continue to suffer given the recent stock market declines that have sent jitters throughout the market. Moreover, last year’s tax reform that doubled the standard deduction reduced the incentive to buy a home, which has also helped the apartment market.

We still expect construction to remain robust in 2019 before completions drop off in 2020. Occupancy is expected to remain positive, although vacancy rates are expected to increase, as new supply will outpace demand growth in most metros. That said, stronger apartment demand in a number of metros could push developers to file more permits, which could extend the construction cycle. This is especially likely in New York and Suburban Virginia where Amazon is building two new headquarters and creating 25,000 jobs over ten years.

Our outlook remains favorable given the current conditions of positive job growth and tepid housing sales. The recent momentum should keep rent growth positive even as vacancy rates are likely to edge up a bit in the next few quarters.

Summary of Reis Apartment Statistics: Q4 2018