Mortgage Rate Increases Drive Apartment Investment Index Drop

Significant mortgage rate increases drove declines in Freddie Mac’s Multifamily Apartment Investment Market Index across most markets for both the fourth quarter and the full year.

“Higher mortgage rates were a significant contributor to AIMI’s virtually across-the-board declines,” said Freddie Mac Multifamily Research and Modeling Vice President Steve Guggenmos. “In the fourth quarter of 2017, we saw the seasonality of rents lead to declines in net operating income. However, annually, net operating income growth was positive in nearly every market.”

Guggenmos noted the index illustrates the nature of the multifamily market across both periods–“a competitive environment where property price growth is driven by tight supply and strong demand for rentals.”

The firm’s Apartment Investment Market Index combines multifamily rental income growth, property price growth and mortgage rates to measure multifamily market investment conditions. A rise in the AIMI from one quarter to the next implies an increasingly favorable environment for multifamily investment. A decline suggests attractive investment opportunities are more difficult to find.

The index a decrease in 12 of the 13 markets studied during the fourth quarter. Nationally, AIMI declined approximately 3.57 percent. Seattle (-7.75 percent) and Boston (-7.15 percent) saw the sharpest declines, while Houston was the only market to see an increase; the index rose 2.49 percent, largely driven by last fall’s hurricanes.

“Driving these declines were increases in mortgage rates over the fourth quarter,” the report said. “Moreover, negative quarterly net operating income growth occurred nationally and in ten local markets–likely due to the seasonality of rents.” Orlando and Houston had positive net operating income growth over the quarter.

Quarterly property price growth was strong, with increases in nine of the thirteen local markets and nationally, Freddie Mac Multifamily said. Three markets were essentially flat, while Chicago-area property prices declined.

The AIMI decreased 6.52 percent nationally and in all local markets on an annual basis. Atlanta (-10.25 percent), Seattle (-9.93 percent) and Boston (8.68 percent) saw the most significant annual change in the index. Orlando, Fla. remained virtually flat at -0.15 percent.

Mortgage rates increased 25 basis points during 2017, which increased the magnitude of the index’s decline, the report said. But 12 local markets and the nation experienced annual net operating income growth; only Chicago did not see positive NOI growth.

Freddie Mac Multifamily said property prices grew in every market except Philadelphia. Several markets exhibited significantly lower price growth than their long-term average.