Apartment Markets Soften Slightly

Apartment market conditions weakened a bit in January compared with three months earlier, according to a recently-released January 2014 Quarterly Survey of Apartment Market Conditions from the National Multi Housing Council.

Indicators for market tightness, sales volume and debt financing were slightly below breakeven level, although the equity financing index rebounded.

Higher interest rates may largely explain the modest decline in both sales volume and debt financing. With considerable equity capital continuing to look for apartment opportunities, a number of respondents noted a growing divide between would-be buyers and sellers on pricing.

“Apartment markets are little changed from October,” said Mark Obrinsky, NMHC’s Senior Vice President for Research and Chief Economist. “At least half of our respondents to each of our four main questions reported conditions as unchanged from three months earlier. Although markets are a little looser than in October, this is largely seasonal; overall markets remain fairly tight.

“New supply is finally starting to arrive at levels that will more closely match overall demand. In a few markets, we are seeing completions a little higher than absorptions, but this is likely to be short term in nature. Fundamentally, demand for apartment homes should be strong for the rest of the decade (and beyond) – provided only that the economy remains on track.”

Some respondents noted that the decline in market tightness was typical for this time of year and that conditions remain fairly tight.

Half of respondents reported sales volumes were unchanged from three months earlier, while one-third reported lower sales than in October. These results were similar to responses from the previous two surveys in July and October 2013.

The Equity Financing Index rose to 50 from 39. The majority of respondents (58 percent) continued to report that the availability of equity financing remains unchanged from three months ago. This is the ninth time in the past 10 quarters that more than half of the respondents considered conditions unchanged (and in that other quarter, the figure was 49 percent). Approximately one-fifth of respondents (18 percent) believed that financing was more available than three months prior, essentially the same as the share of respondents (17 percent) that said financing was less available.

The Debt Financing Index was essentially unchanged at 42. This was one point higher than the October index, which came in at 41. While this level was significantly below the year-ago figure of 74, half of respondents reported unchanged conditions for debt financing. Almost one-third (30 percent) regarded conditions as worse, in large part due to the rise in interest rates – and the prospect for further increases. Even so, 14 percent of respondents indicated conditions had improved.

Opinions continued to be mixed regarding the availability of capital for new development. The consensus was that debt financing was still widely available, but equity financing was perhaps a bit more constrained. Two-fifths of respondents reported both equity and debt financing as widely available, up slightly from October’s 34 percent. An almost equal percentage (39 percent) regarded debt financing as currently available but said equity financing was currently constrained; this figure was down from 43 percent in October. An additional 13 percent believed that both debt and equity financing are currently constrained, down from 21 percent. The remaining 8 percent reported equity financing as widely available, but debt financing constrained. [Note: These shares exclude respondents that chose “Don’t know/not applicable.”]

The January 2014 Quarterly Survey of Apartment Market Conditions was conducted January 6-13, 2014; 157 CEOs and other senior executives of apartment-related firms nationwide responded. Full survey data are available online here.

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