Apartment markets showed still further signs of tightening as the improvement in the supply-demand fundamentals continued, according to the National Multi Housing Council’s (NMHC) April 2006 Quarterly Survey of Apartment Market Conditions. However, the pace of apartment property sales has eased off from last year’s torrid pace. The Quarterly Survey found that the steady rise in interest rates led to a sharp decline in debt financing conditions, while the availability of equity capital was unchanged.

“While investment activity continues at historically high levels, there has clearly been some pullback from the extraordinary levels of late 2005,” said NMHC’s Chief Economist Mark Obrinsky. “Higher interest rates are also reducing the advantage of leverage, which may lead to a shift in the profile of buyers of apartment properties over the near term. The big rate-driven advantage enjoyed by private buyers over institutional competitors appears to be diminishing.”

The Survey’s four indexes measure changes in market conditions between January and April 2006. An index reading above 50 indicates that, on balance, conditions are improving; a reading below 50 indicates that conditions are worsening; and a reading of 50 indicates that conditions are unchanged. Results are as follows:

The survey’s Market Tightness Index remained at 83. This was the fourth consecutive quarter in which the index was at least 80 (a mark that had never been reached before in the seven-year history of the survey). It was also the 11th consecutive time the index has been above 50 — that is, the 11th consecutive quarter of improving demand (measured by lower vacancy rates, higher rents, or both). Fully 72 percent of respondents reported tighter conditions (the second highest on record), while only 5 percent reported looser conditions.

In the face of steadily rising interest rates, the Debt Financing Index dropped sharply to 21, the lowest level since January 2000, and the third-lowest level on record. Overall, 69 percent of respondents (the second highest ever) reported that borrowing conditions had worsened (considering interest rates and non-rate terms) in the previous three months. Even though interest rates are at the highest levels in about four years, mortgage finance remains widely available.

The Sales Volume Index also dropped in the past quarter, to 35, the lowest level in more than four years. It was also the second straight sub-50 reading, indicating there are more markets with lower sales volume of apartment properties than there are markets with higher sales volume. In fact, only 9 percent of respondents noted higher sales volume than three months earlier. That is the lowest such level since January 2002.

The Equity Financing Index edged down a bit to 50, indicating that equity finance conditions are unchanged compared with three months earlier. In fact, the 12 percent of respondents that reported equity financing is more available today was exactly offset by the 12 percent of respondents who said equity financing is less available. The clear majority (69 percent) noted that conditions were unchanged.

Once again, the survey asked about the impact of those displaced by Hurricane Katrina on apartment markets. More than two-thirds (68 percent) indicated that there is little impact. This is a much higher figure than the 51 percent response of the previous surveys. Only 8 percent of respondents indicated that occupancy is up substantially, while 23 percent noted that occupancy was up somewhat.

The April 2006 Quarterly Survey was conducted April 24-May 1, 2006. Seventy-five CEOs and other senior executives of apartment-related firms nationwide who serve on NMHC’s Board of Directors or Advisory Committee responded. Full survey results are posted at www.nmhc.org/Content/ServeContent.cfm?ContentItemID=3854.

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