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Tuesday, January 22, 2013

NMHC Apartment Survey: Market Conditions Loosen Slightly

by Calculated Risk on 1/22/2013 01:45:00 PM

From the National Multi Housing Council (NMHC): Expansion Moderates for Apartment Markets in January

After a seven-quarter run, expansion moderated for apartment markets according to the National Multi Housing Council’s (NMHC) January Quarterly Survey of Apartment Market Conditions. For the first time since 2010, two of the four indexes – Market Tightness (45) and Sales Volume (49) – dipped below 50, though just barely. The two financing indexes show continued improvement for the 8th consecutive quarter, as the Equity Financing (56) and Debt Financing (57) Indexes remained above the breakeven level of 50.

“The pace of improvement in the apartment industry is moderating, but the expansion remains solid,” said Mark Obrinsky, NMHC’s Vice President for Research and Chief Economist. “Lease-up demand is seasonally weak in January, which would fully explain the small drop in the Market Tightness Index. Beyond that, markets were quite tight three months ago, and remain tight today. New construction has picked up considerably since its 2009 low, but is still playing catch-up with the increase in demand for apartment residences.”
Market Tightness Index declined to 45 from 56. The change ends an 11-quarter run for the index at 50 or higher. Fifty-nine percent of respondents said that markets were unchanged, reflecting stable demand conditions. One quarter of respondents saw markets as looser, up from 14 percent in October, while 16 percent viewed markets as tighter.
emphasis added
Apartment Tightness Index
Click on graph for larger image.

This graph shows the quarterly Apartment Tightness Index. Any reading above 50 indicates tightening from the previous quarter. This quarterly decline followed eleven consecutive quarters with tighter market conditions.

The recent Reis data showed apartment vacancy rates fell in Q4 2012 to 4.5%, down from 4.7% in Q3 2012. As Obrinsky noted, markets are still tight, but this might suggest the vacancy rate will stop declining (caveat: this is just one quarter of survey data and the index might bounce back).

On supply: Even though multifamily starts have been increasing, completions lag starts by about a year - so the builders are still trying to catch up. There will be many more completions in 2013 than in 2012, increasing the supply.

As I've mentioned before, this index helped me call the bottom for effective rents (and the top for the vacancy rate) early in 2010. This survey now suggests vacancy rates might stop falling - a possible significant market change - although apartment markets are still tight, so rents will probably continue to increase.