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Apartment Market Continues to Tighten

08/02/2012 | By Carisa Chappell

Apartment Market Continues to Tighten

Showing no signs of slowing down, market conditions continued to grow more favorable for property owners in the apartment sector for the sixth consecutive quarter, according to data from the National Multi Housing Council (NMHC).

"The apartment sector's strength continues unabated," said Mark Obrinsky, NMHC's chief economist. "Even as new construction ramps up, higher demand for apartment residences still outstrips new supply with no letup in sight."

NMHC's quarterly survey of CEO's and senior executives of apartment-related firms nationwide regarding apartment market conditions, released July 30, suggested that the sector is continuing to benefit from fewer vacancies and increased rental rates. For the first time since July 2011, more than half of the respondents, 55 percent, reported tighter rental markets than the previous quarter, reflecting lower vacancies and higher rents. In the previous quarter, 49 percent reported tighter market conditions.

In contrast, 2 percent of respondents to the most recent survey reported looser markets, indicating higher vacancy rates and declining rents, while 43 percent said the market was unchanged from the previous quarter.

Apartment REITs' stock performance suggests that investors have already factored the sector's strong fundamentals into apartments' pricing. Through Aug. 1, the apartment sector had total returns of 11.78 percent for the year, according to FTSE NAREIT U.S. REIT Index data. That trailed the performance of the broader equity REIT market, which saw total returns of 16.72 percent for the same period.The S&P 500 was up 10.69 percent for the year.

Despite the need for new apartments, Obrinsky added that financing continues to be a growing challenge for some companies in the sector. While the apartment industry has been able to attract capital, it is still primarily targeted toward the core markets.

The majority of the survey's respondents reported that acquisition financing (65 percent) and construction financing (55 percent) were only available in top-tier markets. Meanwhile, 16 percent reported acquisition capital is available in all markets at all times, down slightly from the 17 percent who said the same in the previous quarter. Lenders appear even less inclined to provide capital for new construction, as 10 percent of survey respondents stated that construction capital was available in all types of markets.