Apartment deal volume continued to decline on a year-over-year (YOY) basis with a 22% drop in February, on sales of $7.4 billion, according to Real Capital Analytics (RCA). This change, while still large, was not as severe as the 56% YOY decline in market volume noted in the firm's US Capital Trends Apartment Report in January.
Despite the drop in deal volume, cap rates fell to 5.5% across all asset types, down 30 basis points (bps) YOY. Mid-/high-rise cap rates declined to 4.8%, and garden apartment cap rates to 5.6%, both historic lows. Amid the current market environment, RCA proposes that the falling cap rates may have caused the drop in deal volume, given rising interest rates and buyers’ uncertainty about the future of cap-rate movement.
The nature of the pullback in apartment transactions has shifted in the first few months of 2017, the report notes. In most of 2016, portfolio- and entity-level transactions were on the decline; total 2016 activity in this sector was down 3% from 2015, while individual-asset sales rose 7% YOY. However, single-asset sales have fallen an average of 25% YOY over the past three months, with a 22% YOY drop on sales of $5.9 billion in February.
According to the February 2017 report, single-asset sales “represent the bedrock of the market.” A drop in these sales may translate into a drop in investors’ confidence in smaller deals, similar to the decline in megadeals in 2016.
Fannie Mae and Freddie Mac gained some ground again in 2016, rising from 52% of all lending activity between 2013 and 2015 to 53% of all such activity in 2016. The Federal Housing Finance Agency (FHFA), conservator of Fannie and Freddie, recently eased the lending caps that were imposed on the two government-sponsored enterprises (GSEs) in 2012 after they achieved a 68% share of the market.
Currently, Fannie and Freddie are particularly dominant in garden apartments in student housing, with 62% and 61% shares, respectively. The two remain the largest mid-/high-rise lenders but hold only 35% of the market.
International banks, insurance companies, and commercial mortgage-backed securities (CMBS) lenders have all lost market share. CMBS lenders, in particular, fell from 10% market share in 2014 to 2% in 2016. National and regional/local banks, in contrast, gained a combined 9% of market share and now make up 29% of all apartment lending.
While local/regional banks and CMBS lenders tend to have similar loan sizes, CMBS lenders have been left with loans on “comparatively lower-quality assets.” The price per unit for assets tied to regional and local banks is more than twice as large as that for assets tied to CMBS loans, and CMBS assets carry the highest average cap rates out of all loan types, at 6.6%.
CBRE and Berkadia are the No. 1 and No. 4 originators, respectively, in the apartment market and the top two originators in the garden apartment submarket, but CBRE ranked only No. 7 for mid-/high-rise units, while Berkadia ranked No. 10. This isn't just a function of Delegated Underwriting and Servicing (DUS) lender concentrations, notes RCA—Wells Fargo and Walker & Dunlop, the top two mid-/high-rise originators, are also the No. 2 and No. 3 originators, respectively, overall. Mid-/high-rise loans are usually larger, but the garden apartment market exists on a wider scale, with a wider need for debt capital.