Apartment Transaction Volume Rises in Q2, But Clouds Appear on the Horizon
Asset values continue to rise, but the rate of growth slows.
Overall apartment sales increased in Q2 6 percent year over year. But in its latest report, Real Capital Analytics (RCA) says that one large transaction masks market softness overall.
Without Starwood Capital Group’s purchase of the Milestone Apartment REIT for $1.3 billion, which represented 9 percent of the transaction volume in the quarter, deal volume would have fallen 7 percent year over year.
“The headline figure might lead one to think there is renewed optimism in the apartment sector but the trend really points to a buyer and seller impasse that would drive a retreat in sales,” according to RCA.
The decline was most profound in garden-style community sales. In that subtype, sales fell 9 percent in Q2, while mid and high-rise single asset volume dropped 12 percent. In the previous two quarters, single asset sales rose among garden apartments, but declined in the mid- and high-rise subtype.
“Single asset sales are the bedrock of the market,” Jim Costello, Senior Vice President at Real Capital Analytics. “Single-asset deals are underwritten one property and income stream at a time. Trends here really reflect investors’ perceptions of the sector.”
Prices continue to rise for apartments, though barely in some cases. The research company’s pricing index, RCA CPPITM, for garden apartments posted 10 percent year-over-year growth in Q2, but prices for mid and high-rise assets only posted 1percent growth in the same timeframe.
Cap rates for garden-style communities have continued to fall over the past year, hitting 5.7 percent in Q2, according to RCA. Garden cap rates are now on a similar footing as mid- and high-rise cap rates. Cap rates in both subtypes are now 100 basis points lower than their long-term averages.
“The interesting thing is that mid- and high-rise assets were at that 100-basis-point spread a year ago and have not changed,” Costello says. “Garden assets were at an 80-basis-point spread a year ago but that compressed to a 100-basis-point spread. With everything priced to perfection in the mid- and high-rise space, that capital flowed more to garden assets and bid up the pricing there next.”
As has been the case recently, deal activity has been challenged in what RCA refers to as the six major metros (New York, Boston, Washington, Los Angeles, San Francisco and Seattle) than in other markets. Single-asset volume fell 31 percent to $7.1 billion year over year in the non-major metros, while single-asset sales grew 3 percent to $18.5 billion in the other metros.
“Mid- and high-rise assets are heavily concentrated in the markets with the most construction underway,” Costello says. “That competition and the fact that there are many, many more towers planned, has investors skittish in these locales. The garden sector simply is not building as much so fit aces fewer fears.”