Survey Finds Apartment Market Conditions Largely Unchanged, but Bright Spots Appear

Washington, D.C.–Apartment industry market conditions are mostly unchanged from three months ago, according to the National Multi Housing Council’s latest Quarterly Survey of Apartment Market Conditions. But two key metrics, sales volume and availability of equity financing, showed some signs of improvement.

In an accompanying comment to the survey, NMHC chief economist Mark Obrinsky said the uptick in sales volume and equity financing were steps, however small, to a more normal transactions market, noting that 2009 recorded the lowest number of transactions in a decade.

For the second consecutive quarter, the survey’s Sales Volume Index reading was above 50. The index was 56 in January, indicating that sales volume in the U.S. is increasing. The Equity Financing Index of 66 also showed that equity finance conditions are also strengthening. (For all four of the indexes, a reading above 50 indicates conditions are improving; a reading below 50 indicates that conditions are worsening, and a reading of 50 indicates conditions are unchanged.)

These figures track what Linwood Thompson, managing director of the National Multi Housing Group at Marcus & Millichap Real Estate Investment Services, is seeing in the marketplace.

He says that the firm’s multifamily investment sales volume in the last quarter of 2009 was double that of the previous eight months. He attributes the pickup to buyers finally resigning themselves to the fact that they are not likely to see the drastic discounts in multifamily property prices that they once hoped for, and are now more realistic in their pricing expectations. And, with the economy starting to grow, along with a subdued level of development, apartment rents could grow by 3 percent in 2011, and further increase by 4 or 5 percent in 2012 and 2013, Thompson says.

He also notes that some institutional investors are increasingly willing to underwrite a year of negative rent growth in their investments, as they believe the market has reached a bottom, and will still be able to achieve their required investment returns at the end of their hold periods

The survey, however, was less positive in other areas. The Market Tightness Index, which measures apartment vacancy rates, was only 38, which Obrinsky predicts will only improve when the U.S. economy starts adding jobs. And the Debt Financing Index fell just short of the 50 percent level, at 49 percent.

Thompson said the debt financing scenario is very case specific. Debt for new construction, and for marginal properties in secondary markets, can be difficult to access. But, Fannie Mae and Freddie Mac are still funding multifamily properties, he said.

While noting that Fannie and Freddie debt is more expensive than it once was, long-term debt from the two mortgage giants can be had in the 6 percent range, which, Thompson says, “works for a lot of deals.”

The January survey was conducted January 19-26, 2010, with sixty-nine CEOs and other senior executives of apartment related firms nationwide who sit on NMHC’s board of directors or advisory committee responding.