Despite economic uncertainty, the apartment transaction market remained strong in the third quarter, according to New York–based commercial real estate research firm Real Capital Analytics (RCA).
Overall, the quarter posted sales volumes of $13.3 billion, though the rate of growth slowed to 4 percent, which wasn't a surprise given seasonal adjustments. Cap-rate compression also accelerated, falling by 140 basis points. So far this year, $36.2 billion worth of apartments have sold, which is approximately a 70 percent increase over last year. Portfolios are accounting for a larger percentage of that portion: So far, 15 deals valued at more than $100 million closed in the past two quarters.
Garden apartments outsold mid- and high-rises in terms of dollar volume and cap rates last quarter. The gap appearing between core and value-add pricing is starting to close as yields are bid down in secondary markets. Garden properties have seen their yields fall, which RCA attributes to a decline in interest rates. Meanwhile, cap rates for mid- and high-rise properties stayed about the same in the third quarter.
In both the mid-/high-rise and garden sectors, cap rates fell a lot farther in secondary markets, offering a hint that investors are moving out of the top markets for returns. Yields in tertiary markets have stayed at 7.5 percent since 2009 and are now very appealing to investors. RCA speculates that the apartment recovery is emboldening investors to move out on the risk spectrum and look for opportunities in secondary markets and the value-add space.
“The spread between secondary and primary seems to be closing,” says Ben Thypin, senior market analyst for RCA. “That could be a function of just a few very aggressive transactions in the secondary markets, or it could be something larger.”
Despite this movement toward secondary markets, RCA says core properties still command a premium. Part of the reason for that is there’s simply not enough core property available in some markets. Thypin thinks a possible Archstone sale could alter this dynamic, depending on how it’s broken up.
“[Archstone has] a lot of product in New York,” he says. “There’s not a lot of attractive product in New York, at least on the institutional side, because pricing is just insane. The chance of getting a real foothold in this market with several properties could lead a REIT to make a big investment [there]. Some markets are deep enough that it won’t have an effect. But in some markets that are starved for inventory, it could have an impact.”
But that impact won’t be felt in the fourth quarter, because, despite the recovering sales pace through 2011, a lot remains to be determined in the last quarter of the year.
“In the third quarter, a lot of people are away during August and it slows down a little bit. The fourth quarter is typically very active, so it should be really interesting to see whether this little slump during the third quarter is a bump in the road or maybe a trend," Thypin says.