Single-asset sales continue to increase as investors chase yield and safety in a potential recession.
In September 2018, Greystar closed its $4.6 billion purchase of student housing REIT EdR. This year’s third quarter didn’t see a comparable transaction, which is a big reason why deal volume fell 7 percent year over year (YOY), according to the most recent Real Capital Analytics (RCA) US Capital Trends apartment report.
Despite the decline in sales volume and the fact that only one entity-level transaction closed in the quarter (Cortland’s $1.2 billion purchase of Pure Multi-Family REIT), RCA still sees a healthy apartment-transaction market ahead.
For one thing, single-asset sales are growing. In the third quarter of 2019, deal activity rose 8 percent YOY in the segment. “Single-asset sales are up as recession fears are stoking further investor demand for investments in the apartment sector,” RCA said in the report.
With a potential recession coming, investors want to find properties where capital expenses won’t be as challenged in a downturn, according to RCA. Citing the National Council of Real Estate Investment Fiduciaries (NCREIF) data, RCA says the apartment sector has the lowest ratio of capital expenses costs relative to other commercial sectors.
Regardless of buyers’ motivation, apartment executives are still seeing strong interest in their assets. James A. Bloomingdale, Senior Vice President and Head of Acquisitions for JRK Investors, says transaction volume is holding steady YOY. “There’s a lot of money chasing deals,” he says. “Rates are staying low, and we’re seeing a lot of deals getting done.”
Johnny Gregorio, Senior Associate, Eagle Rock Advisors, sees a lot of competition for deals in the Northeast and Mid-Atlantic. “There’s a lot of capital in the market ready to be deployed in value-add deals, and you see that reflected in purchase prices,” he says.
The data back up Gregorio’s observations about apartment costs. Apartment prices rose 7.7 percent YOY in September, according to the RCA CPPI (Commercial Property Price Indices). While that’s slower than the 11.4 percent pace set in September 2018, it’s stronger than that for all other property sectors.
In this low-return environment, investors are chasing yield. Right now, value-add apartments serve this need. “It’s a very challenging environment to acquire any properties that have a value-add component—all the upside is already priced in,” says Robb Bollhoffer, a Managing Principal and Director of Acquisitions at 29th Street Capital (29SC).
With so much interest in value-add, 29SC has changed its strategy. “Transaction volume has definitely decreased for 29SC on the acquisition side but has picked up on the disposition side,” Bollhoffer says.
Bollhoffer detects excess leverage in the market, which he says feels similar to 2007, which is also driving his decision to sell.
“On the properties we’re selling, there’s a common theme of bridge debt; then, preferred equity and mezzanine; and, then, a small amount of equity,” Bollhoffer says. “Now is a great time to upgrade the vintage of our portfolio.”
As it sells older assets, 29SC sees more opportunity to develop core-plus properties. “We’ve opened a development business unit in Sacramento [Calif.], since this market is underserved on the supply side, and our cost basis will still be below some of the older-vintage assets that are trading in the market,” he says.