Multifamily Investment Conditions Improve: Freddie Mac

The latest report shows positive performance for most markets in the second quarter.
Photo by Skull Kat on Unsplash

It may be easier this year than last year to find attractive multifamily investment opportunities, according to a new index reading by Freddie Mac that saw its Multifamily Apartment Investment Index (AIMI) increase in the second quarter after a slight dip in Q1.

The AIMI is updated quarterly and combines three market factors—multifamily mortgage rates and growth rates in multifamily property prices and rental income—to offer investors insight in the conditions in the multifamily investment environment nationally and in select metros.

Steve Guggenmos, vice president of Freddie Mac Multifamily Research & Modeling, said in a prepared statement the second-quarter AIMI showed a positive environment for multifamily investors in most markets, including those hit hard by the pandemic.

Guggenmos credited the low-rate environment and strong net operating incomes (NOIs) with offsetting the slight rise in mortgage rates. He said that indicates a healthy market going into the second half of 2021.

Multifamily mortgage rates increased by 5 basis points in Q2, the first quarterly increase since the fourth quarter of 2018, but still down 37 basis points annually.

Overall, the index is up by 0.7 percent quarterly and 2.6 percent annually with most markets in positive territory. Over the second quarter, the AIMI increased in the nation and in 22 of the 25 markets tracked by the index.

Market Performance 

The only markets that did not see growth were Phoenix, Minneapolis and Jacksonville, Fla. The Freddie Mac report found NOI growth was universally positive for markets and the nation. The markets that saw NOI grow the fastest were Orlando, Fla., with an 8.3 percent increase, and Phoenix, up 8.5 percent. The report noted even the slowest growing metros, Minneapolis and New York, had strong NOI growth of 2.6 percent.

Also during Q2, property prices were up across the U.S. and in 24 of the 25 markets tracked. New York was the only metro to see a drop with a decline of 1.5 percent.

By comparison, the 2Q 2020 AIMI, released last September, showed the pandemic was impacting multifamily conditions in the U.S. during that quarter as NOI shrank in almost all major markets. The AIMI fell by 0.3 percent during the second quarter of 2020 as overall NOI dropped by 1.2 percent, the first negative second quarter for NOI since 2009.

It was also the first time in the history’s index that both AIMI and NOI were negative at the same time. The good news in that report was that despite a difficult second quarter in 2020, AIMI increased by 6.1 percent on an annual basis mainly due to low borrowing costs and a 0.4 percent increase in NOI.

Looking at the annual numbers for 2021, the AIMI increased in the nation and in 20 of the 25 markets. NOI was up on a national level and in 17 markets. New York and San Francisco posted double-digit NOI declines—down 13.0 percent and 15.1 percent respectively. They were also down Q1 in a year-over-year comparison. Freddie Mac notes that is very rare for any market on an annual basis. Six other markets also posted annual NOI losses.

New York and San Francisco also showed property price contraction over the year. Oakland, Calif., was the one metro where property prices remained the same while the nation and 22 markets experienced property price growth. The report found over the past year property prices grew by 7.5 percent, while NOI grew by 5.2 percent. Mortgage rates were down by 37 basis points.

The combination of the changes in the index “suggests that investors are paying less per dollar of property income compared with one year ago,” according to Freddie Mac commentary.