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California Multifamily Market: Vacancy Low, Tenant Quality Up

Mortgage Originations on Apartment Buildings Up

Jay Harris    |    Mortgage Performance

Nationally, rental apartment markets have been on sound footing with ‘tight’ market conditions and strong levels of new development (see February 2016 Economic Outlook video blog). Demand and supply forces vary across the U.S., and local rental markets will often be ‘tighter’ or ‘looser’ than the national average.  In particular, the rental market in California has experienced one of the lowest rental vacancy rates in the U.S. While the Census Bureau has reported that the national average rental vacancy rate was 7 percent in 2015, in California it fell to 4 percent, the lowest in at least 30 years (see Exhibit 1).

Coincident with the tightening of apartment markets in California, the quality of new tenants has improved. Applicants to California rental properties are less likely to default on their lease terms and have a growing ability to pay rent with both of these measures steadily improving over the past three years.

The CoreLogic lease risk model shows that California applicant lease scores have rapidly improved from an average applicant score of 329 in 2013 to 425 in 2015. A growing lease score suggests a greater likelihood to meet lease terms without default.  Combining bureau and lease-predictive non-bureau consumer data, the CoreLogic proprietary, statistically validated lease risk score represents a substantial improvement over scorecard models and “rules of thumb” – “old-school” screening methods that used to be rental housing providers’ primary methods of measuring applicant lease default risk.

Applicant-stated income per lease, as collected by CoreLogic Multifamily Solutions, grew similarly over the same period among California rental applicants from $6,307 per month in 2013 to $8,307 per month in 2015. This growth reflects multiple factors, including more applicants taking a roommate or applying with a co-signor, as well as higher stated income per person.

California rental traffic demonstrates an uncommon seasonality. In most markets around the country, the best qualified applicants tend to apply between April and September, typically the busiest rental season. In contrast, the best qualified rental applicants in California apply at the end of the year, according to CoreLogic data. For three straight years, the fourth quarter marked the period with the highest average incomes and applicant scores among California rental applicants.

Multifamily Origination 2015

Multifamily Origination 2015

Strong rental market conditions have triggered new apartment development.  Coupled with a low mortgage rate environment, there has been a rebound in lending on multifamily properties.  Multifamily originations in California reached a new peak during 2015 with more dollars lent than in any preceding year.  The resurgence in lending has been driven by property sales, refinance and new mezzanine debt placed on existing properties and by permanent financing secured by newly completed structures. 

According to CoreLogic data, roughly 90 percent of the lending on multifamily properties occurs in the eight largest metropolitan areas in California and just over one-half in the combined Los Angeles-Anaheim-Riverside metropolitan areas (see Exhibit 2).  Loan sizes vary substantially within and across areas, with many well below $1 million and some above $10 million.  While it varies by metro area, approximately one-half of the dollar volume of loans originated during 2015 were $5 million or more.  With new completions coming on the market in 2016 and low mortgage rates supporting refinance, lending volumes may remain at similar levels in the coming year.

Frank E. Nothaft contributed to this blog post.

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