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Study: Rising Interest Rates Dampen Debt Financing Conditions in Apartment Sector

07/31/2013 | By Carisa Chappell

While the demand for apartments remained strong during the second quarter of 2013, increasing interest rates have put a damper on debt financing conditions, according to data from the National Multi Housing Council (NMHC).

NMHC’s quarterly survey of CEOs and senior executives of apartment-related firms nationwide found that 67 percent of the respondents said the cost of debt financing for apartments has risen since April 2013. Additionally, just 8 percent of respondents said debt financing conditions had improved.

“Interest rates have risen 90 basis points since the April survey was conducted, leading two-thirds of the survey respondents to cite worsening debt finance conditions,” said Mark Obrinsky, senior vice president for research and chief economist.

In NMHC’s Debt Financing Index, a reading above 50 indicates that borrowing conditions are improving and below 50 indicates that borrowing conditions are worsening. The indicator fell from 59 in the first quarter of 2013 to 20 for the second. Despite more expensive borrowing conditions, Obrinsky said he expects the impact on market activity to be minimal.

“Recent [Federal Reserve] comments have been widely interpreted as hinting at a near-term shift to a somewhat tighter monetary policy,” he said.  “It remains to be seen whether that occurs, considering the still-sluggish pace of growth that has characterized the current recovery. In any event, rates remain low by historical standards and are not likely to put too big a crimp in transaction activity going forward.”

Obrinksy said he expects the apartment sector to continue to have strong operating fundamentals. Overall, survey respondents reported that “everything else remains steady,” Obrinsky noted.

“Underlying demand trends remain strong, and we are approaching the cusp of a meaningful increase in apartment supply that will hopefully be large enough to meet the need,” he said.

The majority of the survey’s respondents, 55 percent, reported tighter rental markets than the previous quarter, reflecting lower vacancy rates and higher rents. In the previous quarter, 54 percent reported tighter market conditions.

Respondents also reported rising construction costs, with 68 percent indicating that costs had increased by more than 5 percent since 2012.

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