“U.S. real estate markets are about to see an unprecedented level of foreign investment as the lack of domestic financing coupled with recession and the weak dollar helps to usher in a new base of investors to pick over the remains.”

Joe Valente, head of Portfolio Management and Strategy at Allianz, PropertyWire, June 25, 2008.

Current conditions in the U.S. coupled with global wealth imbalances and pension fund demand for alternative assets like real estate paint a very bright outlook for U.S. multifamily real estate.

Although slower economic growth will soften fundamentals, supply-side risk will decline as the development pipeline narrows due to caution and more stringent lending requirements. As underwriting standards have tightened, highly leveraged buyers are also squeezed out of the market, resulting in less competition for assets and less near term price pressure due to weakening competition.  These tighter lending standards will limit development, which is already more balanced than in past cycles due to higher constructions costs, land scarcity and greater industry transparency.

After homeownership peaked in 2004 at 69 percent, November 2007 saw this rate decline to 67.5 percent as the housing market downturn continues to cause the rate of homeownership to retract. This rate is forecast to keep retracting in 2008 as housing market performance continues to decline. Given that homeownership has an inverse relationship with the propensity to rent, the upward trend in renter population from 2006 – 2008 coincides with the housing market downturn and associated decline in homeownership.   The current propensity to rent is well below the 34.1 percent average since 1980, suggesting that the proportion of households renting may increase beyond analysts’ forecasts for 2008 – 2010.

The Fund expects this increased rental demand to primarily fall on the multifamily apartment property sector with demand to increase as a result of the increased demand for rental housing. The impact of this increased demand will be further magnified by the reduction of apartment stock over the past couple of years due to condominium conversions. As underwriting standards have tightened, highly leveraged buyers are also squeezed out of the market, resulting in less competition for assets and less near term price pressure due to weakening competition.

Overall, the availability and cost of debt has changed, yet healthy occupancy levels, rent growth and a lack of overbuilding are the basis for an optimistic view of the multifamily apartment sector in particular.