Apartment Market Tightens in Q2: NMHC Survey Finds Improved Conditions Across the Board.

The National Multifamily Housing Council's (NMHC) Q2 survey shows market conditions tightened, with the Market Tightness Index at 54, above the breakeven level of 50. Sales volume and debt financing indexes also improved, while equity financing remained below 50. Rent growth remains low in the South and West, while tighter conditions persist in the Northeast and Midwest. Transaction volume increased for the second consecutive quarter.

The National Multifamily Housing Council's (NMHC) Q2 survey reveals a tightening of market conditions, with the Market Tightness Index reaching 54, surpassing the breakeven level of 50. This index indicates that the multifamily market is experiencing a higher level of demand relative to supply. Sales volume and debt financing indexes improved, while equity financing remained below the 50-point threshold. Rent growth remains subdued in the South and West, while tighter conditions persist in the Northeast and Midwest. Transaction volume increased for the second consecutive quarter, reflecting a robust market.

CBRE's latest multifamily underwriting survey [1] highlights a modest improvement in underwriting metrics. Both core and value-add assets saw slight enhancements in underwriting assumptions, with modest compression in going-in and exit cap rates. Core assets' going-in cap rates decreased by 6 basis points (bps) to 4.75%, while exit cap rates fell by 4 bps to 4.96%. Value-add assets' cap rates decreased by 8 bps to 5.2% and 1 bp to 5.3% for going-in and exit cap rates, respectively. The spread between going-in and exit cap rates widened for both asset classes, increasing from 19 bps to 21 bps for core assets and from 11 bps to 18 bps for value-add assets.

Buyer sentiment diverged between core and value-add assets. Core asset buyers became more neutral, with 56% expressing positive sentiment, down from 65% in the first quarter. Value-add buyer sentiment rebounded, with 61% expressing positive sentiment, up from 48%. Sellers of value-add assets expressed largely neutral sentiment. Rent growth expectations improved modestly, and internal rate of return targets remained stable across most markets. Coastal and high-demand markets, such as Boston, Los Angeles, and Seattle, led the sentiment recovery.

Travis Deese, director of multifamily research for CBRE, noted, "In the second quarter, we saw a modest but meaningful improvement in underwriting metrics across both core and value-add multifamily assets. While sentiment around core assets softened slightly, the rebound in value-add buyer confidence and continued cap rate compression reflect growing optimism as market fundamentals stabilize."

References:
[1] https://www.multifamilyexecutive.com/business-finance/business-trends/underwriting-metrics-improve-slightly-for-multifamily-sector-in-q2/