Condo market stronger, rental market improving

Following several quarters of deteriorating market conditions, optimism is on the rise among multifamily developers that the demand for apartments will improve over the next six months, according to the results of the National Association of Home Builders' Multifamily Market Index, which was released Sept. 26.

The MMI, which gauges builder sentiment about current and future market conditions, registered almost an eight-point gain for market-rate apartments and a six-point gain for affordable apartments between now and six months out.

For current conditions, the index stood at 38.1 for market rate apartments and 42.8 for affordable apartments, while the index gauging expectations for the next six months was 45.9 and 48.9, respectively. While this gain is a reason for optimism, any number below 50 indicates that more apartment builders view conditions as poor rather than good, so the overall outlook for the apartment market remains weak.

"The rental apartment business has felt the impact of both the jobless recovery' that has slowed household formation and strong home sales driven by extraordinarily low interest rates," said Ron Terwilliger, managing partner of Trammell Crow Residential and chair of NAHB's Multifamily Leadership Board, in an NAHB news release.

"Despite the current slow demand, however, multifamily properties continue to provide acceptable returns relative to other real estate investments," he said, "and we expect to see healthier conditions returning by the latter half of 2004."

Prospective renters

The volume of calls from prospective renters has been steadily rising, up from an index value of 36.6 in fourth-quarter 2002 to 49.3 in the current MMI. This reinforced the optimism among the survey's respondents. Effective rents have inched upward as well, from an index value of 44.4 in fourth quarter 2002, to a current index value of 48.

Current demand continued to show weakness, however, with high-end apartments (Class A) reporting the lowest index number, 39.5. Demand is somewhat stronger for Class B and C apartments, at 43.3 and 45.5, respectively. Overall, respondents reported only two-thirds of new apartments were rented within 90 days. The overall reported vacancy rate was 7.9 percent, compared to 6.3 percent in the fourth quarter of last year.

The current quarter's index value for the new production of market-rate multifamily apartments stood at 38.1 compared to 41 in fourth quarter. For lower-rent apartments, the index was at 42.9, also weaker than fourth-quarter 2002's index of 51.3. Condominium starts, however, had a stronger showing, at 53.4, compared to 51.1 in last year's fourth quarter.

Interest rates

Low interest rates appear to have contributed to the strong consumer interest in for-sale condominiums, the one segment of the multifamily market that has shown strength on the demand side over the past several quarters. According to the MMI, apartment developers expect that strength to continue over the next six months.

"The condo/for-sale component of the market for new multifamily units continues to perform relatively well," added NAHB's Chief Economist David Seiders. "Furthermore, multifamily producers and managers foresee stronger rental market conditions six months down the line, based largely on expectations for higher home mortgage rates and a stronger job market."

The MMI is based on a survey of multifamily developers, owners and managers, whose answers to a series of questions are assigned numerical values in order to calculate separate indices that track both supply and demand.

An index value of 50 indicates that the number of positive responses equals the number of negative responses.