Apartment Market Conditions Reach New Lows

Market conditions in the multifamily sector are as bad as they’ve ever been, according to the National Multi Housing Council’s (NMHC) latest quarterly survey on apartment market conditions.

For starters, the responses indicate that availability of debt and equity funding is at record lows since the NHMC survey was initiated at the end of October 1999. The 2008 survey was conducted in mid-October and based on responses from 70 senior executives of multifamily industry-related firms nationwide.

The survey utilizes respondents’ input as data for a series of indices that track market tightness, sales volume, equity financing and debt financing. The indices reflect market conditions using a reading of zero to 100. A reading higher than 50 indicates conditions that are more favorable for the industry.

“Nine straight months of job losses have begun to cut into the demand for apartment residences,” says Mark Obrinsky, vice president of research and chief economist for NMHC. “While favorable demographics and a lower homeownership rate will benefit the apartment industry over time, owners and managers will first have to work their way through the current economic downturn before the benefits of that increased demand are likely to show up. Until then, economic worry will cause some people to ‘double up’ by moving in with a friend or returning to their parents’ house.”

The reading on an index relating to availability of equity financing for multifamily properties registered four for the survey period, a record low and also the sixth consecutive quarter of weakness.

A majority of survey respondents, 93%, reported that equity funding was less available today than three months ago. In the October 2007 survey, only of 60% respondents felt that equity funding was less available over the same period. Availability of debt funding for multifamily properties was also at a record low of four. Moreover, 93% of the respondents felt that it is worse to borrow now than it was three months ago compared with 76% in the year-ago survey.

Even though the multifamily sector has benefited from the presence of Fannie Mae and Freddie Mac whose lending activity has boosted the availability of funding for multifamily properties, it has not been enough to pick up the slack left from the total inactivity of the commercial mortgage-backed securities sector.

“Our indexes for equity and debt financing set record low levels, as other sources of capital have left the market,” according to Obrinsky. “This has contributed to a record-low reading for property sales as well.”

The survey’s sales volume index was down to five, another record. For 12 consecutive quarters now, the sales volume index has been down. And 90% of the respondents said that sales volume was lower than in the previous quarter.

In addition, market conditions are becoming considerably looser, with an index measuring market tightness dropping to 24 from 40 in the previous quarter, which means that markets are less characterized by low vacancies and high rent increases.

An additional question was posed by NMHC in the current survey for the first time. The organization asked whether the credit crisis has affected the respondents’ current or planned activities. While about 60% of the respondents said that the crisis has had a “material impact on current and proposed business activities,” none of the respondents see it as having little or no impact on their business.

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