Buoyed by a record number of individual apartments sales, the market seems primed for a late-cycle run.
The ride may not be over yet.
After stumbling out of the gate in 2017, the apartment investment market posted a strong Q1, according to Real Capital Analytics (RCA), deal volume growing by 55 percent, year-over-year. Of the sectors tracked by RCA, the apartment sector, which saw 27 percent more activity than office, was the “largest, most liquid” commercial group in Q1, RCA reports.
RCA’s findings are supported by observers nationwide.
Brian McAuliffe, President of Institutional Properties and leader of CBRE’s Multifamily Division, speaking in late April, says his “book of business” has been strong in 2018.
“When you compare year-over-year, it’s relatively positive because the market started off so slow in 2017,” he says. “In 2018, everyone has a lot more conviction [about the direction of the market] on the buy side and on the sell side than a year ago.”
Overall, cap rates essentially went unchanged compared to Q1 2017, hovering at 4.9 percent in Q1 2018 for mid- and high-rise assets and 5.9 percent for garden-style apartments.
“There is still a lot of money out there and deals are still trading at similar cap rates to last year,” says James A. Bloomingdale, Senior Vice President and Head of Acquisitions at JRK Investors.
Despite relatively flat cap rates, apartment values increased in the quarter, according to RCA’s CPPI, which measures apartment values. The company attributes the disconnect between cap rates and values to the assets sold having, on average, fewer units per building, which drives cap rates higher.
“Competition is fierce,” says Blackfin Co-founder and Managing Partner Doug Root “Despite the rise in interest rates and the uptick in transaction volumes versus Q1 2017, there has not been any pricing relief. We have been able to close two transactions in 2018, but we feel very fortunate to have found those deals because it has been like trying to find a needle in a haystack.”
Good deals are hard to find because investors still want apartments. While buyers certainly would like more buying opportunities, McAuliffe has seen some improvement on that front.
“One trend we’re seeing is that sellers are more willing and more motivated to put assets on the market today than they were a year ago,” he says.
The Hot Targets
While portfolio and entity-level transactions slowed, individual sales skyrocketed 74 percent, according to RCA. Jim Costello, Senior Vice President at RCA, says this first quarter had the most ever individual apartment sales.
“Investors are underwriting individual buildings and not making a bet on a big portfolio play or some financial instrument that they can leverage a little more easily,” Costello says. “They are going after one building, one submarket, one neighborhood at a time, and are underwriting all of the cash flows on that one transaction. That reflects a confidence in apartments as an investment vehicle.”
The strongest growth in deal volume by dollar amount was in New York, Los Angeles, San Francisco, Boston, Washington, D.C., and Chicago. In some of these markets, apartment prices have grown more than 100 percent during the past decade. Still, secondary markets had the most apartments change hands.
McAuliffe sees a lot of activity on the coasts (specifically the West Coast with its limited offerings because of lack of space), Texas, and Florida because its rent growth performance in 2017.
In the major markets in Florida, Marc deBaptiste, Vice Chairman at ARA, A Newmark Company, says 2017 was the biggest year ever for multifamily sales volume.
“In terms of product type, value-add has received the most attention from buyers during the past 12 months,” deBaptiste says. “We are beginning to note that more core product is making its way in the market for sale. Also, suburban core product is generating more interest among investors.”
McAuliffe sees strength in the value-add market.
“Investors are looking for outperformance in a market where you have very little appreciation,” he says. “Those markets where you have a spread between value-add rents and Class A rents is where we have the biggest activity.”