The U.S. apartment market continues to struggle, but shows early signs of possible stabilization, according to the National Multi Housing Council’s latest quarterly survey of apartment conditions. Some 75 CEOs and other senior executives of apartment-related firms participated in the survey conducted July 20 through July 29.

All four of the survey’s market indexes covering occupancy, sales volume, equity finance and debt finance remained below 50, indicating that conditions had worsened over the past three months. Still, three of the four indexes posted higher readings when compared with the previous quarterly survey. Only the Debt Financing Index, which fell from 41 to 39, declined during the period.

“Apartment demand remains tethered to an economy that continues to shed jobs at a fairly rapid pace,” stated NMHC Chief Economist Mark Obrinsky in a press release. “Financing is beginning to stabilize, but the market is still a long way from ‘normal’.”

“The survey also suggests that transaction activity is mainly being restrained by uncertainty in apartment property values — whether they have bottomed out —and not financing constraints.  Only when this uncertainty fades are we likely to see a significant upturn in apartment transactions,” added Obrinsky.

Fears of future declines in property values help explain why apartment firms are struggling to obtain equity financing.  In a special survey question, 76% of respondents indicated that the potential for a drop in property values best explained the lack of equity availability.  

Another 13% pointed to deteriorating apartment market conditions resulting from the economic downturn; 7% said lower leverage required by lenders had reduced expected returns; and 3% said lower leverage means that the same equity capital supports fewer transactions.  Several respondents indicated that all of these conditions have contributed collectively to the challenges in obtaining equity finance.    

Among the survey highlights:

 * The Market Tightness Index rose from 16 to 20, marking the eighth straight quarter in which the index remained below 50. On the bright side, it was the third straight quarter in which the index measure rose. A growing number of respondents reported that vacancies were unchanged from the previous quarter, a sign of stabilization.

 * The Sales Volume Index rose again from 30 to 44, the highest level in 14 quarters.  Twelve percent of respondents said sales volume was higher — the highest percentage reporting that trend in two years.  It is possible that some buyers and sellers are beginning to test the waters in this depressed transaction environment. Still, this was the 15th consecutive quarter the index was under 50, an indication of declining sales.

 * The Equity Financing Index increased from 29 to 39.  The majority of respondents (68%) thought equity financing conditions were unchanged, the highest such response in seven quarters.  This was the ninth consecutive quarter with an index reading below 50.

 * Approximately three out of 10 respondents indicated that the market conditions for debt financing had worsened, which led to the drop in the Debt Financing Index. This marked the ninth straight quarter the index posted a reading under 50.  

A complete recap of the survey can be viewed at www.nmhc.org/goto/QuarterlySurvey09.