The apartment industry reached record highs in both deal volume and pricing in 2019, according to Real Capital Analytics. But things would have been even better in the fourth quarter if the New York transaction market had not collapsed.

"New rent control regulations have put owners and potential buyers on the sidelines in the Manhattan and NYC Boroughs markets," RCA said in its "Capital Trends U.S. Apartment" report. "Deal activity in New York City fell 64 percent from a year earlier in Q4'19 and was down 44 percent for the year. The big unknown is whether the trends underway here will remain a local issue or if the burgeoning calls for various forms of rent control in other markets will begin to change investor perceptions of opportunities across numerous U.S. markets."

Other sources also reported problems in New York. Ariel Property Advisors reported the city's multifamily dollar volume dropped by 40 percent, followed by a 36 percent drop in transaction volume and a 47 percent drop in building volume. 

Dollar volume hasn't been this low since 2011, when it was just over $5.2 billion. Similarly, Ariel stated that transaction volume hasn't dipped below the 300-transaction benchmark since the company started tracking data in 2010—the volume fell to 290 last year.

When rents are capped, Costello says, those investors who buy an apartment community make upgrades and look to leave the market. "They know the returns from that kind of activity won't be as great because they can't count on a rent increase," he says.

Costello says these investors will look to smaller and secondary markets for apartments that can earn high returns. "They will go to cities and metros where there is less of a call for rent control," he says.

There will still be a class of investors who purchase assets in rent control markets, but they have a very specific investment goal. "It is a smaller group of investors who are just focused on real estate as a bond equivalent over the long-term," Costello says.

With Brookfield buying two companies and Greystar acquiring EdR, entity-level transactions accounted for 5 percent of total volume in 2018. In 2019, those entity transactions only accounted for 1 percent of deal volume. Single-assets sales, which are the bedrock of the market as investors underwrite single assets, rose 10 percent in 2019. If you take out New York City, deal volume rose 13 percent for the year.

As deal volume increased, prices rose. The RCA CPPI, which measures price, climbed 9.6 percent for the year, with the strongest growth coming late in 2019. Total cap rates have been flat in the sector, with the 30-basis point increase in large markets and 30-basis point decline in smaller markets.

The 2010s were a good decade for the apartment industry. The sector's prices climbed 163 percent, while prices in the office sector only increased 73 percent. Starting in 2015, the apartment sector's deal volume outpaced that of the office segment.

"For the apartment sector to be smaller than the office sector at this point, annual deal volume would have to fall by $50 billion," Costello says. "It would have to be a complete devastation of deal activity. That would probably be triggered by some broader microeconomic thing that would affect everyone."

Brad Dillman, the Chief Economist at Cortland, doesn't expect that type of devastation to occur anytime in the near future. He thinks the multifamily transaction market should remain strong as the 2020s start.

"I expect that transaction volume is going to be pretty consistent as it has essentially been the last couple of years," Dillman says. "It has held up remarkably well. I think it is a reflection that this space is becoming more institutional and it's becoming more liquid."