OREANDA-NEWS. Negative guidance revisions by select multifamily REITs reflect headwinds in specific markets rather than a change to demand prospects nationally, according to Fitch Ratings. We expect multifamily REITs to deliver mid-single-digit same-store net operating income growth during 2016, a still-healthy level, compared with other commercial real estate sectors though a deceleration from prior years.

We believe that the declining US homeownership rate has been the common factor driving multifamily operating performance nationally. Multifamily demand has taken share from single family as homeownership rates have declined, enabling apartment owners to absorb elevated levels of new supply without negative consequences. We believe constrained single-family mortgage lending is the primary factor driving the homeownership rate lower, which in turn is boosting multifamily demand across markets, in some cases overshadowing traditional local and regional demand considerations. The effect is similar to single family home price appreciation in the run up to the financial crisis.

New supply and weaker job growth, primarily in select West Coast, tech-centric employment markets and New York City, were the primary drivers of the multifamily REIT guidance cuts and not higher homeownership rates. Therefore, we do not think these guidance reductions speak to any larger national trends for apartments, and we expect idiosyncratic market-level performance driven by local supply and demand fundamentals. Together with job growth and household formation, Fitch is focused on apartment move-outs to purchase homes and single-family mortgage financing availability, particularly non-agency securitizations, to gauge the direction of apartment demand nationally.

The multifamily REIT guidance cuts will test investor confidence in CRE fundamentals in heretofore strong, primarily West Coast, tech-centric employment markets. Tech employment has been a bright spot during this recovery and has lent strength to space demand across most property types in markets such as San Francisco, Silicon Valley, Seattle, West LA, Austin, Denver, Raleigh and New York City. We view office REITs as most at-risk from weaker tech employment growth given overweight portfolios for many companies in these markets and related development risk.

Today's tech companies generally have more viable business models than those in the tech bubble, and many of the Bay area's largest employers are very well capitalized (e.g. Apple, Google and Microsoft). Many of the fastest growing social media and sharing economy companies are using technology to disrupt a diverse set of established industries, making them less cyclically sensitive to changes in corporate capex than the manufacturing-oriented companies that dominated Silicon Valley in the second half of the 20th century.

However, venture capital (VC) availability remains a cyclical common thread that influences the level of demand in tech-oriented markets. The outlook for VC funding has darkened during the past year against the backdrop of generally weak tech-IPO performance and down round private equity financings and selective layoffs at marquee fast-growing tech companies. Also, Fitch believes smaller tech companies play a critical role driving marginal demand for both space and employees.

The amount of speculative leasing is a key unknown that will influence the severity of office market downturns due to lower tech tenant demand. Speculative leasing occurs when companies lease more space than they currently need in anticipation of future growth, which is typically motivated by concerns over rapidly rising rental rates and limited space availability.