In the third quarter of 2007, conditions weakened in the apartment industry compared with three months earlier, according to the National Multi Housing Council's (NMHC) latest quarterly survey. In part the consequence of the recent turmoil in the financial markets, declines were evident in sales volume, equity financing and debt financing.
At the same time, NMHC adds, three-quarters of respondents noted that the tightening of mortgage credit in the for-sale market has reduced the number of renters leaving apartments to become homeowners.
"The underlying demand for apartment residences has changed little over the last six months. As long as the job market holds up, demand conditions should remain favorable," says Mark Obrinsky, chief economist at NMHC. "But it is clear that the recent credit market disruptions have had an impact on the apartment market.
"Many transactions had to be postponed while the buyers sought alternative financing arrangements, he continues. "In most cases, such financing was found, allowing the deals to go through, but in the meantime, the volume of activity slowed."
According to the survey, the market tightness index slipped to 46 in October. (For all four of the survey indices, 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.)
This figure was the first sub-50 reading in 17 quarters, indicating demand conditions edged down a bit compared with three months earlier. Even so, a majority of respondents (56%) reported that there was no change in their markets. Eighteen percent saw tighter conditions (higher occupancy rates and/or higher rents), while 25% noted looser conditions.
Respondents were also asked about the impact of the subprime mortgage meltdown on the flow of apartment residents leaving to become homeowners. NMHC says that 22% of respondents said that there has been a big decrease in apartment residents departing (compared with 18% who cited this finding in July).
Fifty-three percent indicated that there was a small decrease (compared with 37% in July), and only 24% saw no impact (compared with 46% in July).
In addition, the debt financing index edged down further in October to 17 – from 26 in July. In July, the main cause of the drop was higher interest rates coupled with tighter underwriting by lenders. Since then, yields on the benchmark 10-year Treasury note have retreated, but spreads have widened by a similar amount, leaving borrowing rates little changed.
Problems in the CMBS market have led to decreased issuance of new commercial mortgage securities. However, according to NMHC, most of the slack has been picked up by portfolio lenders as well as Freddie Mac and Fannie Mae.
The sales volume index fell to 12, the lowest level in the eight-and-a-half year history of the survey. It was also the eighth consecutive sub-50 reading, meaning that more markets saw sales volume falling than rising compared with three months earlier.
While the initial decrease in sales volume resulted from the pullback in condo converter demand, the association believes this quarter's figure may be a consequence of dislocations in the financial markets.
Overall, 80% of respondents reported lower sales volume, compared with only 6% who reported higher sales and 13% who reported sales unchanged. These figures are a measure of how widespread the decline in transactions has been, NMHC points out – not a measure of the extent of that decline.
Other data suggest that even though most markets have seen sales volume decrease, the decrease has not been large.
Finally, the equity financing index dropped to 22, also the lowest figure on record. The report found that more than half (56%) of respondents regarded equity finance as less available now than it was three months ago. Still, almost a third (31%) indicated equity financing was unchanged, while 2% saw some improvement in its availability.
Full survey results are available at www.nmhc.org/goto/4451.