Conditions in the apartment sector continued to be less than favorable, according to the January survey of multifamily industry executives by the National Multi Housing Council (NMHC) based in Washington, D.C.
However, based on factors such as sales volume, availability of debt and equity funding, the industry seems to be coming out of the lows hit in the October survey, even as it continues to feel the impact of job losses in the current recession. Ongoing job losses — 524,000 in December — have dampened multifamily vacancies and rent growth, while the credit crunch is also taking a toll on the financing side.
“Once again, apartment firms are facing tough market conditions not of their making,” says Mark Obrinsky, chief economist of NMHC. “Earlier in the decade the bubble-induced rise in homeownership eroded apartment demand. Now the economic and financial collapse caused by the bursting of that bubble is taking a toll.”
The NMHC quarterly survey, which was first introduced in 1999, uses four different measures to capture the state of the industry. Responses are summarized in readings that range from zero to 100, with readings above 50 indicating that conditions are more favorable for the industry.
An indicator of multifamily market tightness — a measure of vacancies and scope for rent growth ¬— was down to 11, the third-lowest reading ever, from a reading of 24 in the October survey. More than 80% of respondents see market conditions as being looser than they were three months ago, as characterized by higher vacancies and lower scope for rent growth.
Survey respondents were slightly more positive about sales volume for multifamily properties. The index measuring this factor was up slightly to 12 from five in the October survey. Still, this is the 13th consecutive quarter that the sales volume index has had a reading under 50. More than 75% of the respondents felt that sales volume in their markets were lower than they were three months ago compared with 90% who felt this way in October, while 20% reported that sales volume was unchanged.
Linwood Thompson, senior vice president and managing director of Marcus & Millichap’s National Multi Housing Group, expects apartment sales volume in 2009 to be flat, and possibly even lower than in 2008. “It all depends on when we reach the bottom of the job-market decline,” says Thompson. “I would say the velocity will not increase in 2009. However, there might be a fair amount of distressed REO [real estate owned] properties that come onto the market in the last half of 2009 that could impact sales velocity.”
Byron Steenerson, president of Alliant Capital LLC, a Fannie Mae DUS lender, also expects that apartment sales volume will be down sharply in 2009. “With the weakening economy, we see increasing cap rates in every market, and in certain markets dramatic increases.”
While buyers are looking to pay lower prices, sellers have not come down on prices. Moreover, buyers are looking more at a property’s actual net operating income (NOI), as opposed to the NOI projections that have been popular in the last few years.
As for the availability of equity financing for multifamily property transactions, the index that measures this factor was up slightly to 12 from four in the previous survey. Not a single respondent felt that equity financing was more readily available than it was three months ago, while 75% felt that it is less readily available. Conditions are unchanged according to another 23%. This marks the seventh consecutive quarter of less than favorable conditions for equity financing.
The good news is that on the debt-financing front, the index reached its highest level in 18 months. Conditions seem to have improved quite a bit, with the index up to 26 from a reading of four in the October survey. In fact, 12% of the respondents see this as a better time to borrow than three months ago, while another 61% say this as a bad time to borrow.
Marcus & Millichap’s Thompson expects that it will continue to be challenging to obtain debt financing for multifamily transactions this year, particularly new construction debt financing. For deals under $10 million, local and regional banks are still active, and for deals above $10 million, Fannie Mae and Freddie Mac are arranging financing.
The availability of debt and equity financing for the sector will remain tight in 2009, according to Steenerson, especially considering that Wall Street players are not in evidence and are not coming back in the near future.
“With so many major providers out of the market, it will continue to be difficult to place debt or equity. While there is a good deal of cash available, investors are holding on to their cash until they believe the economy has hit bottom.”
More than 60% of the respondents to the NMHC survey, who are senior executives of apartment-related firms nationwide, see the ongoing credit crunch as having a material impact on their current and proposed business activities.