Keen investor interest fed by improving fundamentals drove sales of significant apartments to $33.7 billion in 2010, up by 96 percent from a year ago. The year ended on a resounding positive note; $6.1 billion in December sales marked the most active month since October 2007 and the Archstone privatization.
Q4 sales accounted for $12.6 billion in volume, double that of Q4 2009. At first glance, cap rate compression appears to have slowed somewhat in Q4, perhaps reflecting rising interest rates. However, rising sales both in tertiary markets and of troubled properties—almost 25 percent of Q4 apartment deals were sold out of distress—also served to prop up yields.
Nonetheless, the decline in yields over the course of 2010 means that cap rates are approaching levels that prevailed in a more normalized market: Cap rates are on par with the average for the past decade, and volume, too, is comparable to levels sustained prior to the condo conversion and REIT privatization frenzy of 2005-07. Indeed, Q4 2010 volume nearly matches first and second quarter sales in 2005 if condo conversion deals are excluded.
Activity. Portfolio activity has revived as well, a good sign of growing buyer appetites, including a willingness to make bigger bets. The level of apartment portfolio deals tripled to $4.8 billion in 2010.
Distressed Properties. Distressed apartment sales totaled $7.8 billion in 2010, accounting for 23 percent of all volume, well above levels experienced by other property types. The volume of distressed sales increased throughout the year, culminating with nearly $3 billion of transactions in Q4. However, the elevated level of distressed sales combined with an equal amount of loan modifications/ extensions were barely able to keep up with inflows of newly distressed situations. Approximately $15.7 billion of apartments was added to the distress pool in 2010, bringing total distress for the cycle in the apartment sector to $60 billion.
However, as a result of the workouts via sale or modification, the amount of unresolved distress rose by just $2.3 billion to its current $37.9 billion. An important turning point occurred in Q4 when workouts, or outflows from distress, exceeded inflows and the balance of outstanding distress fell for the first time this cycle.
Top Markets. Manhattan regained the top spot from Los Angeles, where a 46 percent gain in volume from 2009 was the smallest of any major or primary market in 2010. Still, there was little significant movement in the rankings, with Washington, D.C.’s Virginia suburbs and D.C. itself notable exceptions. The Virginia suburbs climbed from eighth to third place on growth of 170 percent in sales, while the District rocketed to No. 14 from No. 41 in 2009 on a 661 percent boost. Nine markets passed the $1 billion benchmark, versus just one in 2009.
Used with permission from Real Capital Analytics. Learn more about its U.S. Capital Trends report at www.rcanalytics.com.