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’s) Quarterly Survey of Apartment Market Conditions for July 2023, as the Market Tightness (26), Sales Volume (40), Equity Financing (22) and Debt Financing (18) indexes all came in well below the breakeven level (50).

“Both debt and equity capital continue to pull back from the apartment market amidst an environment of rising interest rates and slowing rent growth,” noted NMHC’s Vice President of Research, Caitlin Sugrue Walter. “As a result, transaction volume fell for the fifth consecutive quarter, with current apartment owners unwilling to offer the lower prices buyers deem necessary to compensate for this diminished economic outlook.”

“Yet, as the Federal Reserve nears the end of its tightening cycle, a small but growing share of respondents are finally starting to report a pickup in apartment deal flow.”

• The Market Tightness Index came in at 26 this quarter – below the breakeven level (50) – indicating looser market conditions for the fourth consecutive quarter. More than half of respondents (57%) reported markets to be looser than three months ago, while only 9% thought markets have become tighter. Meanwhile, around a third of respondents (34%) thought that market conditions were unchanged over the past three months.

• The Sales Volume Index reading of 40 marked the fifth consecutive quarter of decreasing deal flow, albeit with considerably less consensus among respondents than in preceding quarters. In fact, just over a third of respondents (35%) reported lower sales volume, down from 56% of respondents who reported lower sales volume in April and 82% of respondents in January. Meanwhile, 14% of respondents in July thought that volume was higher than three months ago, while nearly half of respondents (47%) reported no change in volume.

• The Equity Financing Index came in at 22 – considerably lower than the breakeven level (50) – indicating the sixth straight quarter in which equity financing became less available. Fifty-seven percent of respondents reported equity financing to be less available than three months ago, while 40% of respondents believed availability to be unchanged. No respondents reported an increase in the availability of equity financing.

• The Debt Financing Index reading of 18 indicated the eighth consecutive quarter in which debt financing became less available. Sixty-seven percent of respondents reported that conditions have worsened for debt financing, 26% thought that conditions were unchanged, while just 3% reported 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 26 in July from 31 in April. 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 fourth 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 decline significantly soon.