NMHC: "Apartment Market Continues to Loosen"

Leading indicator for Rents and Apartment Vacancies suggests more weakness for Apartments

From the NMHC: Apartment Market Continues to Loosen, Transactions Pull Back Further Due to Rising Cost of Capital

Apartment market conditions continued to weaken in the National Multifamily Housing Council's (NMHC) Quarterly Survey of Apartment Market Conditions for October 2023, as the Market Tightness (21), Sales Volume (24), Equity Financing (18), and Debt Financing (9) indexes all came in well below the breakeven level (50).

“A combination of rising interest rates and tightening lending standards has caused a decrease in the availability of debt financing for the ninth consecutive quarter,” noted NMHC’s Vice President of Research, Caitlin Sugrue Walter. “Buyers and sellers of apartments, meanwhile, remain unable to agree to terms on pricing, resulting in the sixth consecutive quarter of declining sales volume.”

“Yet, continued softness in the apartment market means that we should expect the shelter component of inflation to come down eventually as well, which could help overall inflation to cool to the Fed’s 2% target and allow the Federal Reserve to start easing policy. Over the longer term, demand for multifamily housing remains strong based on demographic trends and market fundamentals.”

• The Market Tightness Index came in at 21 this quarter—below the breakeven level (50)—indicating looser market conditions for the fifth consecutive quarter. Nearly two-thirds of respondents (64%) reported markets to be looser than three months ago, while only 6% thought markets have become tighter. Meanwhile, 27% of respondents thought that market conditions were unchanged over the past three months.

• The Sales Volume Index reading of 24 marked the sixth consecutive quarter of decreasing deal flow. A majority of respondents (57%) reported lower sales volume compared to last quarter, up from 35% of respondents who reported lower sales volume in July. Just 5% of respondents thought that volume was higher than three months ago, while 32% reported no change in volume.

• The Equity Financing Index came in at 18—considerably lower than the breakeven level (50)—the seventh straight quarter in which equity financing became less available. Nearly two-thirds of respondents (64%) reported equity financing to be less available than three months ago, a quarter (25%) believed availability to be unchanged, while no respondents reported an increase in the availability of equity financing.

• The Debt Financing Index reading of 9 indicated the ninth consecutive quarter in which debt financing became less available. Eighty-three percent of respondents reported that conditions have worsened for debt financing, up from 67% who said the same in July. Ten percent of respondents thought that conditions were unchanged, while no respondents thought that now is a better time to borrow than three months ago.

Emphasis added

This graph shows the quarterly Apartment Tightness Index.

The quarterly index decreased to 21 in October from 26 in July. Any reading below 50 indicates looser conditions from the previous quarter.

This index has been an excellent leading indicator for rents and vacancy rates, and this suggests higher vacancy rates and a further weakness in asking rents. This is the fifth consecutive quarter with looser conditions than the previous quarter.

Combined with Architectural Billings Index that is showing design weakness for multifamily construction, I expect multifamily starts to remain under pressure.