Apartment Investors Become Pessimistic About Debt Financing

The apartment market has not yet entered a clear recovery. In January, the National Multifamily Housing Council Indexes for sales volume and equity financing both improved beyond the breakeven point, but market tightness and debt financing continued to show weakness.

NMHC chief economist Mark Obrinsky calls this dynamic the “tale of two markets.” The market challenges—which include higher vacancy and negative rent growth, are concentrated in the urban areas. “Many suburban areas, on the other hand, continue to benefit from an influx of ex-urbanites,” adds Obrinsky.

The breakeven point is the 50 mark. A score above 50 shows that more than half of respondents gave a positive outlook, while a score below 50 shows that more than half of respondents gave a pessimistic answer. Sales volume scored 53 on the index, and equity financing had a score of 58. Market tightness, however, scored only 43 and debt financing was rated 49, showing little change from the previous quarter.

Although a pessimistic ranking, market tightness improved compared to the previous quarter. It scored 35 in the third quarter, but increased to 43 at the end of the year. In the survey, 53% of respondents said there was no change in market conditions and 30% said that market conditions were looser. Only 16% of participants said that market conditions deteriorated from the previous quarter.

Sentiment for debt financing, equity financing and sale volume, on the other hand, decreased from the previous quarter. Debt financing fell from 72 to 49, into the pessimistic space, while sale volume fell from 73 to 53 and equity financing fell from 62 to 58.

High-barrier-to-entry markets like New York City, San Francisco and Los Angeles have seen the most significant deterioration in fundamentals during the pandemic. However, most investors aren’t planning to make any significant adjustments to investment strategy yet. Only 8% of survey participants said they plan to disinvest from high-barrier-to-entry markets, while 23% of respondents are planning to continue to invest in these markets. Most are taking a wait-and-see approach with the remaining 48% saying they are reviewing opportunities but will only invest cautiously.

The Allen Matkins/ UCLA Anderson Forecast biannual commercial real estate survey, which looks at investment in California, showed a similar mix of responses. Investors that participated in the investors are optimistic on multifamily and industrial product, but took a pessimistic outlook for retail and office product.