4Q Apartment Investment Index Falls as Interest Rates Rise

The apartment market investment environment deteriorated in late 2018 after stabilizing in the third quarter, Freddie Mac Multifamily reported Monday.

The Freddie Mac Multifamily Apartment Investment Market Index fell more than 3 percent during the fourth quarter and more than 7 percent over the year, mostly due to interest rate increases. The annual increase in interest rates was the highest in nearly a decade.

On the plus side for multifamily investors, apartment property net operating income growth outpaced historic averages during the quarter, Freddie Mac Multifamily Research and Modeling Vice President Steve Guggenmos noted.

Guggenmos said interest rates increased 64 basis points in 2018, the largest annual increase in nearly 10 years. “But net operating incomes generated by multifamily properties across most major markets in the U.S. continued to grow,” he said. “The relatively tight supply of multifamily properties and strong demand for rental units has continued to buoy the market. Unsurprisingly, the Apartment Investment Market Index is impacted as rates rise, but the fundamentals remain quite healthy.”

Freddie Mac’s AIMI analyzes rental income growth, property price growth and mortgage rates to provide a single measure of multifamily market investment conditions. The index decreased for the nation and for every individual market tracked in the fourth quarter except for Phoenix, which showed a slight increase.

Net operating income contracted nationally and in 10 of the 13 metros Freddie Mac tracks. But NOI often changes seasonally and is generally relatively weak late in the year, so this is normal, Guggenmos noted. Seattle experienced the largest NOI decline at 2.1 percent while Phoenix saw the fastest growth at 1.5 percent.

Property prices grew 0.5 percent nationally and increased in eight of the 13 metros studied. Freddie Mac reported Atlanta, San Francisco and Orlando, Fla. all eclipsed the 2 percent property price growth mark for the quarter.

Mortgage rates shot up 19 basis points during the fourth quarter, which contributed to the index’s widespread decline, Freddie Mac reported.

Over the year, AIMI decreased for the nation and for every market, Guggenmos said. The AIMI of five metros–Houston, Orlando, San Francisco, Dallas and Seattle–declined by at least 10 percent. 

But Guggenmos called NOI growth over the past year substantial. “Every market and the nation experienced growth, and all but Houston outpaced their historical average growth rate,” he said. “The nation grew at more than double the historical average annual rate.”

Property prices grew nationally and in 10 of the 13 metros over the past year, Freddie Mac said. New York, D.C. and Chicago all mildly contracted.