Conditions worsen due to "diminished economic outlook and elevated cost of debt"
Apartment market conditions continued to worsen in the first quarter as the prospect of slower economic growth weighed heavily on investors' minds, according to the National Multifamily Housing Council (NMHC).
The NMHC's quarterly survey showed an across-the-board decrease in apartment market conditions, with all indexes – Market Tightness (31), Sales Volume (26), Equity Financing (23), and Debt Financing (29) – falling below the breakeven level (50).
"Apartment operators reported an uptick in vacancies and concessions this quarter," said Caitlin Sugrue Walter, NMHC's vice president of research. "And while some of this softness can be attributed to seasonality, investors remain concerned about the coming wave of supply in some markets and the prospect of slower economic growth in 2023. Only 11% of quarterly survey respondents believe that the Fed will be able to achieve a soft landing this year in its effort to rein in inflation."
The market tightness index came in at 31 in the first quarter, indicating looser market conditions. About 51% of the survey respondents reported markets to be looser than three months ago, while only 14% thought markets have become tighter. Meanwhile, 34% thought market conditions held steady over the past three months.
The sales volume index reading of 26 marked the fourth straight quarter of decreasing deal flow, with 56% of respondents reporting lower sales volume. The equity financing index also fell for the fifth consecutive quarter to a reading of 23, reflecting views (60%) that equity financing has become less available.
The debt financing index posted its seventh quarterly decline to 29. Fifty-three percent (53%) of respondents said debt financing has become less available, nearly a quarter (24%) thought that conditions were unchanged, while 12% reported that now is a better time to borrow than three months ago.
"The transaction market, meanwhile, remains at a virtual standstill, with current apartment owners unwilling to offer buyers the lower prices necessary to compensate for both this diminished economic outlook and the elevated cost of debt," Walter added.
"The Federal Reserve remains committed to bringing down inflation via tighter monetary policy, thereby raising the prospect of slower economic growth," NMHC wrote in the report. "A majority of quarterly survey respondents (64%) believed that a bumpy landing is the most likely scenario, where growth slows to a below average or negative rate and then rebounds to a sustainable pace. Twenty-one percent (21%) of respondents thought that the Fed's actions will lead to a hard landing, or recession scenario, while just 11% predicted a soft landing, where economic growth simply slows to a more sustainable pace."
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