Mortgage Rates, Net Operating Income Drive Apartment Market Increases

Multifamily investing conditions grew “modestly stronger” in the third quarter, reported Freddie Mac, McLean, Va.

“Modest growth in net operating income, taken together with declines in mortgage rates, resulted in moderate increases…from the previous quarter,” Freddie Mac Multifamily Vice President of Research and Modeling Steve Guggenmos said. 

The Freddie Mac Apartment Investment Market Index increased in 11 of 13 markets tracked during the third quarter. Nationally, it remained mostly flat, growing only 0.01 percent. Only Atlanta and Seattle saw declines of -0.43 percent and -1.34 percent, respectively, Freddie Mac Multifamily said.

The Index examines multifamily rental income growth, property price growth and mortgage rates to provide a single index that measures apartment market investment conditions. A higher AIMI from one quarter to the next implies a more favorable multifamily investment environment.

Net operating income growth across 10 local markets and nationally drove the quarterly improvement, the report said. Just three markets–Chicago, Washington, D.C. and Seattle–saw NOI contraction. Moreover, every market experienced property price growth during the quarter, though some markets including Chicago and Philadelphia saw minimal growth. “Like the second quarter, the thid quarter saw declines in mortgage rates, which played the largest role in AIMI’s quarterly increases,” the report said.

Guggenmos noted the Apartment Investment Market Index reflects current market reality: “continued strong demand and a limited supply of rental units,” he said.

The story was quite different on an annual basis, Guggenmos said. “Annually, NOI growth was more significant and more pervasive. However, increases in mortgage rates over the past 12 months were more impactful, and once again drove AIMI’s annual declines.” The index decreased nationally and in every market except Orlando over the last 12 months. NOI grew nationally and in every metro area except Houston and annual property prices grew in every market, but at a lower rate than the pre-recession average. New York, Philadelphia, San Francisco, Washington, D.C. and Orlando all saw price growth below pre-recession averages.

In addition, mortgage rates jumped 24 basis points year-over-year, which lowered the AIMI in most markets, the report said.