High interest rates spoil apartment investment outlook, says Freddie Mac

After interest rates rose to their highest point in nearly ten years, apartment investment outlook dampened in Q4 2018, according to Freddie Mac’s newest Apartment Investment Market Index (AIMI).

The AIMI is an analytical tool that provides a single index that measures multifamily market investment conditions, combining multifamily rental income growth, property price growth, and mortgage rates.

According to Freddie Mac, the AIMI posted a drop of more than 3% in the fourth quarter of 2018 and fell by more than 7% on a year-over-year basis. Houston, Orlando, and San Francisco experienced the sharpest declines.

“Interest rates were up 64 basis points in 2018, but net operating incomes generated by multifamily properties across most major markets in the U.S. continued to grow,” said Steve Guggenmos, vice president of Freddie Mac Multifamily Research and Modeling. “The relatively tight supply of multifamily properties and strong demand for rental units has continued to buoy the market. Unsurprisingly, AIMI is impacted as rates rise, but the fundamentals remain quite healthy.”

Each housing market’s AIMI encountered a downturn throughout 2018, according to the analysis. Every metro except Phoenix retreated in the fourth quarter.

The index also noticed a significant growth in net operating income throughout the year, with NOI increasing in 10 out of 13 housing markets in Q4 2018.

“NOI growth over the past year was substantial,” Freddie Mac wrote. “Every market and the nation experienced growth, and all but Houston outpaced their historical average growth rate. The nation grew at more than double the historical average annual rate.”