Demand for apartment homes remains strong, but the continued credit crunch is causing the volume of property sales to slow sharply and making it more difficult for apartment firms to access the debt and equity markets, according to the National Multi Housing Council’s Quarterly Survey of Apartment Market Conditions.

The Market Tightness Index, which measures changes in occupancy rates and/or rents, rose significantly from 33 in January to 44, as more respondents reported tighter conditions — and fewer reported looser conditions — than three months earlier. While this reading is still below 50, it is not much below, and comes on the heels of 16 consecutive quarters of over-50 readings. (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.)

It is also a sign that the "shadow market" of rental homes being offered by individuals no longer able to afford to live in them is not seriously eroding demand for professionally managed apartments.

"The bursting of the for-sale housing bubble has greatly slowed the outflow of renters into ownership," NMHC Chief Economist Mark Obrinsky said in a statement. "More than 80 percent of the survey respondents reported a decrease in the number of renters leaving to become homeowners."

"Even though there has been an increase in the number of condo and single-family rentals, these properties do not typically compete for the same renters as professionally managed apartments," Obrinsky said. "In fact, professionally managed properties may become even more desirable in the current market as renters of many of these individually owned condos and houses find themselves without housing because the owners of these properties have lost the property to foreclosure."

The housing market downturn and financial market dislocation are affecting multifamily financing, and thus, the volume of apartment property sales, however.

The Debt Financing Index posted a sharp fall, to 22 from 45 in January. Two-thirds of respondents noted that borrowing conditions had worsened compared with three months earlier, a reflection of the continued widening of spreads and tightening of credit standards.

Equity financing is also increasingly difficult to obtain. The Equity Financing Index declined to 13, its lowest reading ever. A record 76 percent of respondents reported that equity finance was less available, compared with 17 percent who indicated conditions were unchanged, and 2 percent who saw improvements.

The Sales Volume Index declined to 13 this quarter, the second-lowest reading in the NMHC survey’s history. This marks the 10th straight quarter where the index was under 50. Three-fourths of the respondents said sales volume was lower than three months before, while only 1 percent said it was higher.

"While there are still many buyers looking to purchase apartment properties," Obrinsky said, "there is an unusually wide disparity between buyers and sellers about the appropriate prices in today’s market. In addition, even though investors remain committed to deploying considerable equity capital in the apartment sector, tighter credit makes it harder to hit target rates of return. The upshot is the current low level of transactions."

Full survey results are posted at www.nmhc.org/goto/QuarterlySurvey08. The April 2008 quarterly survey was conducted April 28-May 5, 2008; 87 CEOs and other senior executives of apartment-related firms nationwide who serve on NMHC’s board of directors or advisory committee responded.


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