A recent report from Chandan Economics warned that current lending practices, coupled with market conditions, could set the apartment sector of the U.S. commercial real estate market up for a bubble.
Loans from government-sponsored enterprises Fannie Mae and Freddie Mac have kept costs of apartment buildings lower than usual, the report noted. This could make it more difficult for industry members unable to refinance their loans in the future after interest rates recover. In addition, with homeownership rates at their lowest point since 1998, financing demand is heightened.
"With so much attention focused on improving apartment fundamentals as a rationale for competitive bidding, market participants are at risk of underestimating the critical role of low-cost financing fueling current apartment trends," Chandan Economics noted.
Sam Chandan, economist for Chandan Economics added in an interview that obtaining a new loan on these properties in several years wouldn't be practical with the current economy, according to Businessweek. He added that the loans that are currently being offered cannot be sustainable when they finally mature.
However, investors are still looking to capitalize, as a report from Ernst and Young found that the distressed commercial real estate loans that mature over the next few years could go a long way in aiding in affordability in the market.