The apartment market in the third quarter remained solidly in the expansion phase of the real estate cycle, albeit at a slower pace than in the second quarter, according to the National Multi Housing Council’s (NMHC) October 2006 Quarterly Survey of Apartment Market Conditions.
“Demand for apartment residences continues to rise, and should remain strong so long as employment keeps rising,” said Mark Obrinsky, NMHC’s chief economist. “While the slowdown in the condo market has had some impact on the investment demand for apartment properties, in every other respect the apartment industry seems to be firing on all cylinders.”
The supply-demand fundamentals are improving; occupancy rates and rents are rising in most markets; and apartment firms are finding it easier to acquire debt and equity. For all four indexes measured in the survey, a 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.
The survey’s Market Tightness Index drifted down from 85 to 70 this quarter. Although this was the lowest level in two years, it nonetheless marked the 13th consecutive quarter in which the index was above 50; in other words, apartment demand has been improving for 13 consecutive quarters as measured by lower vacancy rates, higher rents, or both. Fully 55 percent of respondents reported tighter conditions, compared with 14 percent who reported looser conditions; almost one-third (31 percent) reported no change from last quarter’s strong market.
With interest rates falling, the Debt Financing Index rose sharply to 63 from 29 last quarter and is now at its highest level in almost three years. Overall, 32 percent of respondents reported that borrowing conditions had improved compared to the previous three months, while a mere 6 percent thought conditions had worsened.
The Equity Financing Index rose to 58, up from 50 last quarter, and the best figure in more than a year. More than one-fifth (22 percent) of respondents concluded that equity financing is more available today, outpacing the 6 percent who considered it less available. Once again, a large majority (68 percent) regarded conditions as unchanged.
Although sales activity continues to slow from the record level of transactions conducted in 2005, the Sales Volume Index still rose slightly from 32 to 38. This is the fourth straight reading under 50 for this index; indicating that there are more markets with lower sales volume than there are markets with high sales volume. Fully 30 percent reported slower sales volume, with just 6 percent reporting higher transaction volumes. Clearly, the decline in condo converter demand has affected the overall apartment sales volume.
Full survey results are posted at www.nmhc.org/Content/ServeContent.cfm?ContentItemID=4030. Seventy-seven CEOs and other senior executives of apartment-related firms nationwide who serve on NMHC’s board of directors or Advisory Committee responded to the October 2006 quarterly survey, which was conducted Oct. 23-30, 2006.