WASHINGTON, DC—For the consecutive second quarter, apartment conditions as measured by the National Multifamily Housing Council’s quarterly survey showed signs of ebbing. All four indexes in the survey remained below the break-even level of 50, and two of those indexes retreated considerably from the previous quarter.
“Weaker conditions are evident across all sectors as the apartment industry adjusts to changing conditions,” says Mark Obrinsky, SVP and chief economist with NMHC. “Rising supply—particularly during a seasonally weak quarter—is causing rent growth to moderate in many markets.” Fifty-eight percent of survey respondents reported looser market conditions in terms of vacancies and high rent increases, compared to 49% reporting looser conditions in the October 2016 survey and 16% who said this a year ago.
At the same time, Obrinsky says, “the sharp rise in interest rates in recent months was a triple whammy for the industry. First, higher rates directly worsen debt financing conditions. Second, the associated rise in cap rates also put a crimp in sales of apartment properties. Third, higher cap rates following the long run-up in apartment prices caused greater caution among equity investors.”
While the latest survey’s Market Tightness Index of 25 was down just three points from this past October’s level of 28, it represented the lowest level for this index in seven years. The Sales Volume Index came in at 25 in January’s survey, compared to 42 in October, while Debt Financing declined to 14 from 38 three months earlier. Equity Financing was unchanged at 33.
Survey responses showed an especially precipitous falling-off in market conditions within the Debt Financing Index. Seventy-four percent of respondents said that now is a worse time to borrow, compared to 33% in October and 22% in the year-ago period.
However, says Obrinsky, “The underlying demand for apartment residences remains strong. While new apartments continue to come on line at a good clip, absorptions of those apartments remain strong. As long as the job market continues its steady expansion, any local supply overshoots should be manageable.” NMHC conducted the survey between Jan. 10 and 17 among 148 CEOs and other senior executives of apartment-related firms.
Several economic factors have resulted in net positives for the multifamily sector and prices in core markets are at an all-time high. But just how long can the market continue on this trajectory? Join us at RealShare Apartments East on Feb. 28 and March 1 for insights on succeeding in the right markets as well as navigating and finding opportunities in the more challenging ones. Learn more.