Apartment Market Conditions Continue to Gather Strength

Feb. 14, 2006
NMHC predicts record-level sales transactions may cool a bit

The apartment market expansion continues to gather strength, according to the Washington, D.C.-based National Multi Housing Council’s January 2006 Quarterly Survey of Apartment Market Conditions. Seventy percent of the survey respondents reported improved demand for apartments, measured by lower vacancy rates, higher rents, or both. In fact, for the past 4 quarters, the number of respondents noting looser conditions has been 5 percent or fewer. This suggests that there are very few markets around the country that are seeing conditions worsening.

As a result, the survey’s Market Tightness Index came in at 83, the second-highest figure ever. (The highest, a score of 87, was recorded in October 2005.) This is the 10th consecutive quarter of improving demand. (An index reading above 50 indicates that, on balance, apartment markets around the country are getting tighter; a reading below 50 indicates that market conditions are getting looser; and a reading of 50 indicates market conditions are unchanged.)

The January 2006 survey did offer the first hint that the torrid pace of property sales may be poised to cool a bit. For the first time in 3.5 years, more survey respondents reported lower sales than higher sales. While most respondents (63 percent) saw no change in apartment property sales over the past 3 months, 21 percent noted lower sales volume, up from 11 percent in October 2005. In addition, the percent of respondents reporting higher sales volume dropped from 42 percent to just 15 percent, the lowest figure in nearly 4 years. As a result, the Sales Volume Index slipped to 47, breaking a string of 10 consecutive quarters of increasing sales volume.

“After blowing past all records in 2005, sales of apartment properties may be headed for a bit of a breather,” says NMHC’s Chief Economist Mark Obrinsky. “This may reflect the widely predicted cooling of the condo market in some parts of the country, hence some ebbing of the condo conversion demand. However, with the demand for apartment residences still climbing, there is good reason to expect apartment transactions to remain strong by historical standards.”

Once again, the survey asked about the impact of those displaced by Hurricane Katrina on apartment markets. The results suggest that the Gulf Coast storms are having a modest impact on apartment occupancies as more evacuees move from hotels into rental housing. The number of respondents reporting modest increases in occupancy because of Katrina rose from 33 percent to 42 percent, while the number reporting substantial occupancy gains fell from 16 percent in October to eight percent in January. Overall, however, 51 percent say there has been little impact from the storm. 

On the financing side, lower mortgage rates in the 2 months prior to the survey led to improved debt finance conditions, and equity capital remains easily available.

The Debt Financing Index recovered considerably in January, rising 10 points from 38 to 48. With a score below 50, however, it still shows, on balance, slightly more respondents reporting that, considering interest rates and non-rate terms, now is a worse time to borrow than 3 months ago.

Equity capital clearly remains widely available, with the Equity Financing Index remaining at 54. This is also the 10th straight quarter (and the 14th time in the past 15 quarters) that the index has surpassed 50. Although a strong majority of respondents (61 percent) regarded conditions as unchanged, 16 percent said equity was more available now than 3 months ago, and just 9 percent said it was less available.

The January 2006 quarterly survey was conducted Jan. 23-30, 2006. Eighty 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=3756).

This article was reprinted with permission from the National Multi Housing Council (NMHC). Based in Washington, D.C., NMHC is a national association representing the interests of the larger and most prominent apartment firms in the U.S. NMHC's members are the principal officers of firms engaged in all aspects of the apartment industry, including owners, developers, managers, and financiers. Nearly one-third of Americans rent their housing, and 16 million American households live in an apartment. For more information, contact NMHC at (202) 974-2300, e-mail the council at ([email protected]), or visit NMHC's website at (www.nmhc.org).

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