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Apartment Sales Set Record in 2018

Apartment Sales Record

While 2018 sales hit record volume, things did slow in Q4. Find out what buyers expect from the year ahead.

Even as the cycle matured, and interest rates rose in the fall, investors kept buying apartments in 2018.

More than $172.6 billion of apartments changed hands last year, which was a record level of deal activity and a 12 percent increase compared to 2017, according to New York-based Real Capital Analytics (RCA).

Sales of single apartment buildings drove the sales flurry in 2018. Single-asset sales rose $12.6 billion from 2017 to reach $130.1 billion in 2018, according to RCA. Additionally, portfolio sales rose 15 percent and entity-level sales climbed 23 percent, driven by Brookfield’s acquisition of Forest City for $4.6 billion.

Volume for mid- and high-rise apartments rose 34 percent in 2018, while garden apartment sales only rose 2 percent, according to RCA. Cap rates for garden apartments averaged 5.5 percent, while mid- and high-rose cap rates were at 4.9 percent.

“This growth in volume is occurring in the face of record high prices,” RCA wrote in its US Capital Trends report for Apartments, which was released on Jan. 23. “The RCA CPPI for the apartment sector climbed 8.9 percent in 2018 from 2017. This growth late in the cycle is impressive, but it is a slower pace of growth than recent trends. Prices grew at double digit rates from 2014 to 2017.”

While sales increased in 2018, many buyers endured a problem similar to what they encountered in previous years—a paucity of good apartments to buy.

“We like to say there will be plenty of buying opportunities in our markets, but last year was pretty tough,” says Doug Root, Co-Founder & Managing Partner of Blackfin Real Estate Investors.

When the 10-year Treasury rose above 3 percent in September and October, it did create a pause in the market, which provided an opportunity for buyers. When rates rose, Root thinks the buyers’ side of the market absorbed roughly the first 50 basis points.

“Then there was another tick up that I think caused buyers to pause a little bit,” Root says. “I think sellers were scratching their heads because they were able to name their price for a long time now. Now they were getting pushback from buyers. We saw that a lot at the end of the year.”

Deal volume did slow as the year wore on. It was only up 9 percent year-over-year in Q4 after growing at 14 percent earlier in the year, according to RCA.

As of late November, brokers were calling Matt Ferrari, Senior Managing Director of TruAmerica Multifamily, and encouraging him to pursue their listings because there was less traction or bids from potential buyers.

“I don’t know if that [trend] was because of volatility in the markets or buyers had hit their allocations for the year and were waiting until next year to pursue deals,” Ferrari said at the Bisnow Multifamily Annual Conference East conference in Tysons Corner, Va., in November.

Root was hearing similar things from brokerage firms, but by January he says those firms cleared out their backlog.

“I just made four or five phone calls today to different brokerage shops that cover huge volumes of deals,” he said in early January. “They cover a lot of volume and they said they cleared all of their deals by the end of the year.”

Despite that, Bobby Lee, President and COO of JRK Property Holdings, thinks 2019 will bring more buying opportunities than 2018.

“The recent dislocation in the equity markets and corresponding view of the economic health and chance of recession seems to be trickling into the multifamily sector,” Lee says. “There seemed to be slightly less competition for assets in Q4 versus earlier in the year.”

TruAmerica Multifamily purchased $1 billion of apartment properties in 2018 and plans to acquire roughly the same amount in 2019.

“We will continue to look for under-managed assets or assets with renovation upside in first- and second-ring suburbs around primary and secondary metros,” Ferrari says. “Ideally these suburban assets will be in submarkets that are insulated from new supply.”

While many apartment owners plan to buy as much as they purchased in 2018, if not more, most buyers still expect tough competition as they pursue new deals.

“It is still very difficult,” says Lance Swank, President of Sterling Group. “We have a defined structure and very defined return expectations that we stick to. Some of that is driven by our investment partners, but we are pretty rigid. We might underwrite 100 communities and go under contract with one.”