Increasing Cost of Capital Causes Sales Volume to Drop
Apartment sales volume fell while both equity and debt financing became more costly, according to the National Multifamily Housing Council’s Quarterly Survey of Apartment Market Conditions for July 2022. However, demand in most markets was still strong relative to supply.
“Continued interest rate hikes from the Fed have translated into higher longer-term rates and a higher cost of both debt and equity,” noted NMHC’s Chief Economist, Mark Obrinsky. “While these higher rates have cut into investor proceeds, many sellers are reluctant to lower prices, causing a sharp drop in sales volume.”
“The apartment market recorded its sixth consecutive quarter of tightening conditions, if just barely. Fifty-six percent of respondents reported unchanged conditions, while those reporting tighter conditions slightly outpaced those reporting looser market conditions.”
The stock market has fallen precipitously since the beginning of the year amidst rising interest rates, geopolitical uncertainty and the risk of recession.
- Fifty-four percent of respondents believed that these challenges have decreased investment in the multifamily market. Only 10% of respondents held the opposite view—that investment has actually increased because multifamily is seen as an attractive asset relative to other alternatives in the current market.
- Thirty-five percent of respondents thought that the amount of investment in multifamily has remained about the same during recent months.
- Market Tightness Index came in at 51, just above the breakeven level of 50. This indicates that market conditions have become tighter, albeit with considerable variation by market. Twenty-three percent of respondents reported markets to be tighter than three months ago compared to 21% of respondents who observed looser conditions in the markets they watch. Meanwhile, over half of respondents (56%) thought that apartment market conditions were unchanged from last quarter.
- Sales Volume Index came in at 10—well below the breakeven level of 50—indicating lower sales volume than the three months prior. A vast majority of respondents (83%) reported lower sales volume, 13% reported unchanged volume, while just 3% of respondents thought that sales volume was higher than three months ago.
- Equity Financing Index came in at 18—below the breakeven level of 50—indicating that equity financing has become less available. Two-thirds (67%) reported equity financing to be less available than the three months prior, while just 3% of respondents indicated equity financing was more available. Nearly a quarter of respondents (23%), meanwhile, believed equity financing conditions were unchanged.
- Debt Financing Index came in at just 3 (well below the breakeven level of 50). Nearly all respondents (95%) indicated that now is a worse time to borrow than three months ago. Three percent of respondents reported unchanged conditions for debt financing, while only 1% of respondents felt that conditions have improved. This marks the second consecutive quarter where a vast majority of respondents reported deteriorating borrowing conditions.
About the Survey:
The July 2022 Quarterly Survey of Apartment Market Conditions was conducted July 11-18, 2022; 120 CEOs and other senior executives of apartment-related firms nationwide responded. You can view the report at NMHC | NMHC Quarterly Survey of Apartment Conditions (July 2022) – www.nmhc.org.
Construction Delays in the Apartment Industry Ongoing as Costs Are on the Rise
Fully 97% of apartment developers report experiencing construction delays according to the National Multifamily Housing Council’s (NMHC) Construction Quarterly Survey. Of those experiencing overall delays, 83% reported delays in permitting and 93% reported delays in starts.
Labor availability continues to hamper apartment construction. Just more than half of respondents (53%) reported that labor costs increased as expected over the last three months, while an additional 40% believed labor costs increased more than expected.
When it comes to materials and pricing 83% of respondents reported that deals have been repriced up over the past three months.
Prices are on the Climb: “Rising costs, construction delays and labor shortages – never mind more regulatory barriers and rampant NIMBYism – are making it more and more difficult to build the housing our country so badly needs,” said Doug Bibby, NMHC President. “Former President Obama had it right when he recently said that laws and regulations at the local level are inhibiting the creation of affordable housing. Policymakers need to partner with the private sector to bring down costs and find real solutions.”
“Rising costs, construction delays and labor shortages – never mind more regulatory barriers and rampant NIMBYism – are making it more and more difficult to build the housing our country so badly needs,” said Doug Bibby, NMHC President. “Former President Obama had it right when he recently said that laws and regulations at the local level are inhibiting the creation of affordable housing. Policymakers need to partner with the private sector to bring down costs and find real solutions.”
More Context: This research comes on the heels of an NMHC/NAHB study that found regulation imposed by all levels of government accounts for an average of 40.6% of multifamily development costs. Some developers are now altogether avoiding communities with too draconian regulatory regimes.
- 87.5% of developers avoid working in jurisdictions with rent control
- 47.9% of developers said they avoid building in a jurisdiction with inclusionary zoning requirements
Based in Washington, D.C., the National Multifamily Housing Council (NMHC) is the leadership of the trillion-dollar apartment industry. We bring together the prominent apartment owners, managers and developers who help create thriving communities by providing apartment homes for 40 million Americans. NMHC provides a forum for insight, advocacy and action that enables both members and the communities they help build to thrive. For more information, contact NMHC at 202/974-2300, email the Council at [email protected].