Conditions weakened in the apartment industry during October compared to three months earlier, as the recent turmoil in the credit market took a toll on sales and financing, according to the National Multi Housing Council’s (NMHC) latest quarterly survey.
“The underlying demand for apartment residences has changed little over the last six months. As long as the job market holds up, demand conditions should remain favorable,” NMHC Chief Economist Mark Obrinsky said in a statement. “But it is clear that the recent credit market disruptions have had an impact on the apartment market. Many transactions had to be postponed while the buyers sought alternative financing arrangements. In most cases, such financing was found, allowing the deals to go through, but in the meantime, the volume of activity slowed.”
The Market Tightness Index slipped to 46 in October. (For all four of the survey indexes, 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.) This was the first sub-50 reading in 17 quarters, indicating demand conditions edged down a bit compared with three months earlier. Even so, a majority of respondents (56 percent) reported that there was no change in their markets. Eighteen percent saw tighter conditions (higher occupancy rates and/or higher rents), while 25 percent noted looser conditions.
Respondents were also asked about the impact of the subprime mortgage meltdown on the flow of apartment residents leaving to become homeowners. Twenty-two percent of respondents said that there has been a big decrease in apartment residents departing (compared with 18 percent who cited this in July). Fifty-three percent indicated that there was a small decrease (compared with 37 percent in July), and only 24 percent saw no impact (compared with 46 percent in July).
The Debt Financing Index edged down further in October to 17, from 26 in July. In July, the main culprit was higher interest rates coupled with tighter underwriting by lenders. Since then, yields on the benchmark 10-year Treasury note have retreated, but spreads have widened by a similar amount, leaving borrowing rates little changed. Problems in the CMBS market have led to decreased issuance of new commercial mortgage securities; however, most of the slack has been picked up by portfolio lenders, as well as Freddie Mac and Fannie Mae.
The Sales Volume Index fell to 12, the lowest level in the eight-and-a-half year history of the survey. It was also the 8th consecutive sub-50 reading, meaning that more markets saw sales volume falling than rising compared with three months earlier. While the initial decrease in sales volume resulted from the pullback in condo converter demand, this quarter’s figure may be a consequence of dislocations in the financial markets. Overall, 80 percent of respondents reported lower sales volume, compared with only 6 percent who reported higher sales and 13 percent who reported sales unchanged. Note that these figures are a measure of how widespread the decline in transactions has been, not a measure of the extent of that decline. Other data suggests that even though most markets have seen sales volume decrease, the decrease hasn’t been large.
Finally, the Equity Financing Index dropped to 22, also the lowest figure on record. More than half (56 percent) of respondents regarded equity finance as less available now than it was three months ago. Still, almost a third (31 percent) indicated equity financing was unchanged, while a scant 2 percent saw some improvement in its availability.
Full survey results are posted at www.nmhc.org/goto/4451. The October 2007 Quarterly Survey Ninety 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 2007 quarterly survey, which was conducted Oct. 15-22, 2007.