Nation's Building News Online

Index Finds Rentals Weak But Improving and Condos Stronger

After several quarters of deteriorating market conditions, the number of multifamily developers who are optimistic about an improvement in the demand for apartments over the next six months has surged, according to NAHB's Multifamily Market Index (MMI), which was released on Sept. 26.

The MMI, which gauges builder sentiment about current and future market conditions, registered gains of almost eight points for market-rate apartments and six points for affordable apartments over the next six months.

Nevertheless, in the view of builders the apartment market remains weak. Any number below 50 indicates that more apartment builders view conditions as poor than good, and most of the scores in the latest survey were below that mark: the index of current conditions was 38.1 for market-rate apartments and 42.8 for affordable units and expectations for the coming six months were 45.9 and 48.9, respectively.

"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.

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"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."

The volume of calls from prospective renters has been steadily rising, up from an index value of 36.6 in the fourth quarter of  2002 to 49.3 in the current MMI. Effective rents have inched up as well, from 44.4 to 48.0 over the same period.

High-end, Class A apartments remain in lowest demand, at a score of 39.5, with the market somewhat stronger for Class B and C apartments, which were rated 43.3 and 45.5, respectively. Overall, respondents reported that only two-thirds of new apartments were rented within 90 days. The overall vacancy rate was reported at 7.9%, compared to 6.3% in the fourth quarter of last year.

Market-rate multifamily apartments were 38.1 in the latest index, compared to 41.0 in the final three months of last year. Lower-rent apartments dropped to 42.9, down from 51.3, over the same time frame.

Condominium production, however, gained ground, climbing from a score of 51.1 in the final quarter of 2002 to 53.4 in the latest index.

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. In fact, more than 10% of MMI survey respondents indicated that they are planning to convert some existing rental units to condos in the future.

"The condo/for-sale component of the market for new multifamily units continues to perform relatively well," noted NAHB 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. "

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