Apartment Investment Stabilizes in Q3 Following Sharp Declines

The apartment market investment environment held steady in third-quarter 2018 after slipping in the first two quarters, Freddie Mac Multifamily reported Friday.

After interest rate-driven declines in the first two quarters of 2018, the Freddie Mac Multifamily Apartment Investment Market Index remained essentially flat in the third quarter, said Freddie Mac Multifamily Research and Modeling Vice President Steve Guggenmos. “The good news for investors is that almost every market continues to experience healthy net operating income growth,” he said.

Guggenmos said the multifamily sector remains a competitive market “driven by strong fundamentals girded by a tight supply and strong demand for rentals.”

Unlike the first half of 2018, mortgage rates and property incomes remained relatively flat during the third quarter, leading to stability in the Apartment Investment Market Index, which experienced significant declines earlier in the year due to rising mortgage rates.

The AIMI index slipped more than 7 percent year-over-year, Freddie Mac said. A declining index figure suggests attractive investment opportunities are becoming harder to find.

In the third quarter, seven markets saw AIMI increases and six saw decreases, Freddie Mac said. All markets the GSE tracks experienced positive net operating income growth except for San Francisco, which saw a slight decrease. Property prices grew nationally over the quarter, but New York, Washington, D.C. and Philadelphia all experienced price contraction.

Apartment asset price growth was “atypically low” compared with past third-quarter numbers, the report said. Prices saw the worst third-quarter growth since 2009.

Year-over-year, the AIMI dropped 7.21 percent, with Dallas (-11.84 percent), Seattle (-11.78 percent) and Phoenix (-11.62 percent) experiencing the biggest drops, Freddie Mac reported.

Guggenmos said the largest annual increase in mortgage rates since 2014 drove that decline. Nationally, net operating income grew by the highest amount since second-quarter 2016.

“Property price increased nationally and in all markets except for Chicago and New York,” Guggenmos said, noting three markets–Seattle, Orlando and Phoenix–saw double-digit property price increases over the past 12 months.