A Record Setting $80.5 Billion in Apartments Changes Hands
By Les Shaver
Apartment deal volume set a record in the first half of 2019, but rent control poses valuation issues moving forward.
Driven by strong growth in secondary markets, apartment deal volume posted record highs and topped total commercial property sales growth statistics for the first half of 2019, according to Real Capital Analytics (RCA).
In all, $80.5 billion of apartments sold in the first half of 2019, beating the previous first-quarter record set in 2016. More than half of that volume, $43.2 billion, occurred in Q2, which posted a 19 percent year-over-year (YOY) increase and 7.3-percent YOY price change.
“Record highs this late in the economic expansion are all the more meaningful given how the market achieved this level of sales activity,” RCA said in its “US Capital Trends” report. “Back in 2016, the combination of portfolio and entity-level sales were [the foundation] behind 29 percent of all deal volume in the first half of the year. In 2019, only 23-percent of sales volume was tied up in megadeals.”
Only 2 percent of 2019 sales were entity-level deals (sales of entire companies), compared to 4 percent in 2016. Sales of individual assets, which RCA calls the “bedrock” of the market, struggled in Q1, but rose in Q2.
“It [the interest in single assets] is people making a decision one building at a time that, given all the other investment options; apartments are the place to be,” says Jim Costello, Senior Vice President at RCA.
The RCA CPPI, which tracks apartment value, increased 7.3 percent in Q2, compared to 11 percent a year earlier. Partially driving down prices was the performance in the six major metros: Boston, New York, Washington, Los Angeles, San Francisco and Seattle. The RCA CPPI only rose 4.5 percent YOY in those markets, versus an 8.3 percent gain in secondary and tertiary markets.
Cap rates averaged 5 percent in the six major metros in Q2, which is a 20-basis point increase from a year ago, according to RCA. “The increased deal volume in Q219, along with the cap rate movement, suggests that owners have capitulated a bit on price expectations,” RCA said in the report.
RCA determined that cap rates were up in 11 out of the 15 submarkets that are within the six major metros but increased in only 15 out of 43 remaining markets in the non-major metros.
“People are looking at some of these [six major] metros and making the decision that, given rent control and a host of other factors, they are just stepping back from their [return] expectations,” Costello says. “There is a little bit of uncertainty around what’s going to happen to the rents and apartment income of these markets.”
Dallas led the way in deal volume for the first half of the year, followed by Phoenix, Los Angeles, Atlanta and Houston. Manhattan, which had held the top position for years, fell to No. 8 on the list.
“Again, cap rates are extremely low and a change in rent control regulations have chilled investor optimism [in New York],” RCA wrote in the report.