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Apt. Survey: Financing Availability Putting a Brake On Development

Rents, Occupancy Rates Within 'Striking Distance' Of Breaking Even In Quarterly NMHC Poll
October 22, 2013
In another sign that U.S. apartment market conditions are weakening after a nearly four-year recovery, all four measures of apartment performance dipped below the growth threshold of 50 for the first time since July 2009, according to the National Multi Housing Council’s quarterly survey of market conditions.

Sluggish indices tracking debt and equity financing suggested that apartment company executives are seeing a constraint of capital in the market, especially equity financing for new development projects.

The equity financing index fell to 39 from 49 three months ago. The debt financing index yielded some good news, jumping from 20 in the second quarter to 41 in the third quarter, still well below the theshold for growth.

The Market Tightness Index fell to 46 from 55 three months ago, while the Sales Volume Index remained at 46, unchanged from the previous quarter, according to the NMHC’s October Survey of Apartment Market Conditions.

In sum, the indices showed declining apartment market conditions from the previous quarter, a reinforcement of trends observed earlier by CoStar economists suggesting that the U.S. apartment recovery is at or near its end.

"Although the NMHC survey doesn’t show a large, sudden shift in multifamily debt or equity availability, it reflects potentially growing concerns about the effect of supply on apartment performance," said Luis Mejia, CoStar Director of U.S. Research, Multifamily.

"That said, a slower multifamily capital pipeline could turn out to be beneficial to the apartment market. Some degree of debt or equity rationing could certainly mitigate any potential supply shock, especially in markets with little development constraints."

The survey included the responses of 64 CEOs and other senior executives of apartment related companies nationwide who responded to the query between Oct.7-16.

"After four years of almost continuous improvement across all indicators, apartment markets have taken a small step back," said Mark Obrinsky, NMHC’s vice president of research and chief economist. "Conditions cannot continue to improve indefinitely and new development is at least somewhat constrained by available capital, though more on the equity than the debt side."

Despite the shrinking availability of equity capital, Obrinsky said the market tightness index -- measured as higher rents and/or occupancy rates -- and the sales volume index are "within hailing distance" of the break-even mark, while the debt financing index rose despite the modest rise in interest rates.

"This bodes well for the apartment industry going forward," Obrinsky said.

Survey questions about the availability of capital for acquisitions and new development drew a mixed response.

More than three quarters of respondents, or 77%, regarded construction debt financing as still widely available. However, only 34% believe both equity and debt financing are widely available, while 43% believe equity financing for new development is constrained.

For the 10th consecutive quarter, most respondents viewed equity finance conditions as unchanged from three months ago. By comparison, 27% of respondents viewed conditions as less available for equity capital, while a scant 5% viewed equity financing as more available.

About 22% believed debt market conditions are improved from three months ago, a sizable increase from 8% last quarter, while 41% believed it is now a worse time to borrow, down from 67% in July.

Debt and equity capital flows seem to be adjusting gradually as the market assesses the effect of apartment supply on rents and vacancies, CoStar's Luis Mejia said.

To gauge the effect of potential supply, the average annual number of apartment units delivered in top markets between 2014 and 2017 should surpass by more than 10-15% the average number of units delivered before the recession between 2003 and 2007, Mejia said.

“It is true that as the economy recovers, faster household formation should create demand to occupy the new units,” Mejia said. “But relatively easy apartment financing and prolonged developer optimism have created a supply wave that could adversely affect rents and vacancies -- even in places where today’s economics and demographics are apparently favorable.”
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