McLEAN, VA—Freddie Mac has debuted a multifamily index that measures how the relative value of investing in multifamily properties changes over time both nationally, as well as in certain markets.
The Multifamily Apartment Investment Market Index, or AIMI, combines of three measurements — rental income, multifamily property price growth and multifamily mortgage rates — to create a single number that represents the relative value of investing in the multifamily sector at that point in time. Specifically, the rental income is estimated based on Axiometrics rent and vacancy data.
Property price growth is estimated based on Real Capital Analytics Commercial Property Price Index and National Council of Real Estate Investment Fiduciaries Property Index Returns. Multifamily mortgage rates are compiled from the American Council of Life Insurers.
The 13 metro areas AIMI tracks are Atlanta, Austin, Chicago, Dallas, Houston, Los Angeles, New York, Orlando, Philadelphia, Phoenix, San Francisco, Seattle and Washington DC.
How it Works
Freddie Mac started with the first quarter of 2000 as its benchmark, assigning it a value of 100. Two of the three variables AIMI uses to calculate current Index value — property price appreciation and net operating income growth — are benchmarked to 100 so both measurements start at the same point. These two variables are also metro-specific. Mortgage rates, the third variable, are represented at the national level and are the same across all metros and the nation.
As with all indexes, users will get the most value out of it by comparing it to previous quarters. In AIMI’s case, an increase implies the value of investing is more favorable, while a decrease implies a less favorable investment. Also, Freddie Mac did not design AIMI to be used to compare say, Dallas with Phoenix. It is meant, instead, to be used to study value within a particular market on a stand alone basis.
AIMI is also not a forward-looking index, however investors can play around with some of the metrics and make their own projections about values if they want. A component of the AIMI, the sensitivity tool, http://www.freddiemac.com/multifamily/aimi/sensitivity-table.html lets users adjust NOI growth, mortgage rates, and property value growth to see what a change in one of the areas might have on the index.
Freddie Mac created values going back several years with the index’s launch.
To give one example, the current value for Atlanta is 111; it 131 in the first quarter of 2011. Ergo, the relative value of investing in Atlanta’s multifamily properties is less favorable now than it was in the first quarter of 2011.
Index Debuts at 107
The national index has been trending down over the past several quarters, Steven Guggenmos, vice president of Freddie Mac Multifamily Research and Modeling, tells GlobeSt.com. Right now, apartment pricing are rising faster than revenues or net operating incomes, he explains. At the same time, fundamentals remain very favorable for investors and funding is very cheap as mortgage rates are near historical lows. AIMI distills all of that into a single number, Guggenmos said.
And that number, as of the fourth quarter of 2015, is 107.
Translation: the cost of investing is becoming more expensive.
AIMI’s value goes beyond investors, Guggenmos also said. “We see this becoming an important metric for all stake holders in the multifamily space.”