“It’s another down month for volume, but prices are still increasing,” says James Costello, senior vice president for Real Capital Analytics (RCA), a New York City-based research firm.
Usually prices fall when transaction activity slows down. But strong rent growth and relatively healthy occupancy rates in the apartment sector continue to attract investors, who are then frustrated by the relatively small number and high asking prices of apartment properties available for sale.
“The last three months have been the same story—it has been another month of disconnect between rising prices and falling deal volume,” says Costello.
Property markets cool off
Investors bought and sold $11.7 billion in apartment properties in August 2017, down 8 percent from the dollar volume spent on apartment properties in August 2016, according to RCA.
August would have been even less busy if it were not for a few giant portfolio deals. The dollar volume of single apartment properties sold dropped 18 percent during the month compared to the year before, according to RCA.
Usually, investors start a new year slowly. So far in 2017, the usual declines have been steeper than normal. Experts say fewer properties are available for sale, especially compared to the peak year of 2015. “The volume of property sales was so big… you can’t do that kind of deal volume every year,” says Costello.
Investors are also getting pickier about the properties they buy and the prices they are willing to pay. “Because the market has changed, investors are seeking yield, and in a market where they don’t anticipate any more cap rate compression, that yield is going to come from rent growth,” says Jeffery Daniels, senior vice president and national director for the multifamily division of Institutional Property Advisors, an investment platform.
That pickiness translates to fewer property sales. “In markets that project lower rent growth due to supply and other factors, we’re seeing less investor activity,” says Daniels.
Cap rates still strong for apartment properties
Even though investors are buying fewer assets, they are paying more than ever for apartment properties. The RCA Commercial Property Price Index for apartments rose 9.9 percent in August compared to the year before.
Prices on apartment properties also rose relative to their income in rents, and that kept the yield on investments in the sector near historic lows. “Capitalization rates are flat or even falling,” says Costello.
Cap rates on sales of garden apartment properties shrank to 5.8 percent in August, down 20 basis points compared to the year before. That’s also a full 90 basis points below the long-term average, according to RCA. Cap rates on sales of mid-rise and high-rise apartment buildings remained stable, hovering at or near the 5.0 percent level for most of the last year and a half.
Buyers are still very interested in apartment properties, keeping prices high and cap rates low. But that interest is not always enough to overcome worries about overbuilding and overpaying for assets. It seems less and less likely that prices will rise as quickly in the future as they have in the recent past. “Buyers won’t have cap rate compression to paper over any mistakes they make in underwriting,” says Costello.
Relatively easy access to financing is also helping keep property prices high and cap rates low. Investors have ready access to debt and equity financing to help them buy properties. Potential buyers can also still find partners who are eager to contribute equity capital to their deals.
“The abundance of equity capital in the multifamily space may keep cap rates down,” says Daniels. “The ability of investors to find financing is still very strong.”