COVID continues to hack at city apartment markets

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The COVID pandemic has created a tale of two apartment
markets, with canyons of luxury like Manhattan toppled from their prestigious
pedestal as one-time urbanites shelter in the suburbs.

According to the National Multifamily Housing Council’s
Quarterly Survey of Apartment Market Conditions for January 2021, despite
higher vacancy and lower apartment rent growth overall, the weakness has been
largely concentrated in high-cost urban areas.

Many suburban areas, on the other hand, continue to benefit
from an influx of ex-urbanites, according NMHC chief economist Mark Obrinsky,
who said the latest reports produced a “mixed bag” of results.

While the Sales Volume (53) and Equity Financing (58)
indexes both came in above the breakeven level (50), the index for Market
Tightness (43) indicated continued weakness and the Debt Financing index (49) showed
little change.

Noted Obrinsky, “Less than a third (30 percent) of
respondents actually reported looser market conditions, compared to 49 percent
of respondents in October, 71 percent of respondents in July, and 82 percent of
respondents in April. Instead, a majority of respondents (53 percent) this
month thought that market conditions were unchanged, suggesting that we may be
nearing an inflection point in the market for apartment residences.”

Although the Market Tightness Index increased from 35 to 43,
it remained below 50, indicating looser market conditions. Only 16 percent of
respondents reported tighter market conditions than three months prior,
compared to 30 percent who reported looser conditions. The majority (53
percent) felt that conditions were no different from last quarter.

The Sales Volume Index came in at 53, a decline from 72 in October
but still above the breakeven level and the second-best reading in
two-and-a-half years. There was little consensus among respondents as over
one-third (35 percent) of respondents reported higher sales volume than three
months prior, while 29 percent indicated lower sales volume. Thirty-one percent
deemed volume unchanged from the previous quarter.

The Equity Financing Index edged down from 62 to 58. Nearly
one-quarter (24 percent) of respondents reported that equity financing was more
available than in the three months prior, while a small portion (8 percent)
believed equity financing was less available. However, 52 percent of
respondents thought that conditions were unchanged in the equity market.

The Debt Financing Index dropped from 73 to 49. Twenty-two
percent of respondents reported better conditions for debt financing compared
to three months prior, compared to 24 percent who felt that financing
conditions were worse. The greatest share of respondents (46 percent) thought
that conditions were unchanged in the debt market.

Given that demand has weakened in many of the top tier high
barrier-to-entry markets, such as New York City, San Francisco and Los Angeles,
NMHC asked respondents how they plan to adjust their investment strategies
going forward.

Respondents were generally cautious in their outlook, but
not altogether spooked. Very few respondents (8 percent) said they plan on
disinvesting in these high barrier-to-entry markets entirely. At the opposite
end of the spectrum, nearly one-quarter (23 percent) of respondents indicated
that they will continue to invest in these markets as they present good
long-term potential, and nearly half (48 percent) of respondents said that they
are investing carefully in these areas only when a special opportunity arises.
Finally, the remaining 21 percent of respondents have adopted a “wait and see”
strategy, putting all investment/disinvestment in high barrier-to-entry markets
on hold until a clear post-pandemic picture arises.

In Manhattan, increased inventory is still one of the most
significant headwinds facing the market’s broader recovery, according to the
latest Corcoran report.

Supply remains much higher than Q4 2019 due to the surge in
inventory upon reopening. Inventory is up 36 percent YOY to 9,964 units. The
number of listings also rose four percent versus Q3.

The brokerage reported that, in Q4, buyers closed on larger
apartments but prioritized space and layout over building and location. This
drove median price up about percent to $1.044 million but pulled average price
per square foot down eight percent to $1,615, a four-and-a-half year low.

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