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The Freddie Mac Multifamily Apartment Investment Market Index (AIMI) dropped by 5.4% in the third quarter, with the index down 23.5% year over year. Driven primarily by record mortgage growth, the index decreased nationwide and in all 25 markets on a year-over-year and quarter-over-quarter basis.

The AIMI combines multifamily rental income growth, property price growth, and mortgage rates to provide a single index measuring market investment conditions. A decline suggests attractive investment opportunities are becoming more difficult to find compared with the prior quarter, while an increase from one quarter to the next implies an increasingly favorable environment for investment opportunities.

“Rising mortgage rates continue to fuel a decline in the AIMI,” said Steve Guggenmos, vice president of research and modeling at Freddie Mac Multifamily. “Property prices and net operating incomes, although positive, are now decelerating, further fueling the decline. Multifamily fundamentals remain consistent and strong, but there’s no question that higher rates are having an effect.”

The nation and 11 markets saw their largest annual AIMI decline in the index’s history. According to Freddie Mac Multifamily, over the past year, property prices have seen significant growth, increasing by 21.8%; net operating income (NOI) has grown by 17.7%; and mortgages have risen by 1.31 percentage points, the largest historical increase for the index.

“The impact of the rapid and substantial increase in both mortgage rates and property prices is evident in this quarter’s AIMI,” said Guggenmos. “Although higher rates and property prices have driven the index down, NOI growth remains strong. The drop in AIMI this quarter reflects moderating investment conditions brought about by changing trends in the broader economy. There still exists an overall housing shortage, which is keeping vacancy rates low and rents high.”

Other key findings include:

  • National NOI growth was 2% quarter over quarter, with every metro except for two seeing growth—San Diego was the fastest grower at 4.5%, while Phoenix and Las Vegas saw NOI declines of -1.3% and -0.7%, respectively;
  • Quarter over quarter, property prices grew nationwide and in just over half the markets, with growth slowing significantly compared with the prior quarter and now lower than the long-run average;
  • Mortgage rates also increased by 58 basis points, making it one of the largest quarterly increases in the history of the AIMI dating back to 2000;
  • On a year-over-year basis, NOI growth was positive, exceeding 10% in just over half the metros, but starting to slow; Miami led with annual growth of 21.6%;
  • Property prices grew in the nation and in every market year over year but also are slowing compared with the prior quarter; nine metros grew by less than 10%, while four experienced growth of less than 3%; and
  • Mortgage rates increased by 194 basis points on an annual basis; this also is the largest increase in the history of the AIMI.