Most years, apartment owners and brokers would be doing somersaults if they enjoyed year-over-year sales increases of 50 percent. This year, a report from New York-based research firm Real Capital Analytics saying that sales volume jumped $15.4 billion in the first quarter of 2010—a 50 percent increase over the first quarter of 2009—was met with muted optimism.

The reasons for this cautious optimism were many, but primarily, it was that it didn’t take a lot to improve on 2009—one of the worst years for transaction volume ever.

“Remember what the first quarter of 2009 was like; it was dead in the water,” says Doug Bibby, president of the National Multi Housing Council. “The first quarter will look a lot better, and it does. But it has to be put in perspective.”

Relative Returns
The sales volume in the first quarter of 2010 was roughly the same as the fourth quarter of 2009, which isn’t a bad thing, according to Ben Thypin, senior market analyst at Real Capital. In that quarter, the apartment sector saw the greatest spike in transactions among the commercial property types.

“The fourth quarter of 2009 was big because it was the fourth quarter,” he says. “There is always more activity then because firms want to get in deals before the year ends.”

But this resurgence wasn’t across the board. It wasn’t limited by product type or metro area—with some niches seeing little improvement compared to 2009. In fact, Real Capital says the rebound wasn’t as broad-based as in the office sector. The actual number of apartments sold was about the same as the first quarter of 2009. The main difference was the dollar volume, paced by a number of sales in the New York and Washington, D.C. The two metros were responsible for 40 percent of the first quarter volume.

But some of the hard-hit markets had product moving, too. RCA reported that distressed properties constituted 29 percent of properties sold in the first quarter, which was about twice the distressed sales in other property types. Phoenix, Atlanta, and Tampa, Fla., were among the 10 most active markets, though Las Vegas saw no major sales. ARA’s Phoenix office, for instance, saw its volume rise more than 280 percent in the quarter.

And for sales outside of those markets? Thypin said the drive was still to quality. “The second tier of the market—the Class B property segment—still has a ways to go before the apartment market really recovers,” Thypin says. “People need to start buying those properties if we’re going to see increases in pricing and volume overall.”

Cap Rate Compression
Not surprisingly, with 40 or 50 buyers (and occasionally more) chasing a limited amount of core assets, cap rates have gone down for the right product. Jones says he’s seeing cap rates drop about 75 basis points in his markets. Real Capital says multifamily yields declined two straight quarters and that cap rates fell almost 40 basis points in the first quarter.

Others see this trend as well. “There’s a lot of capital out there,” says Ric Campo, CEO of Houston-based Camden Property Trust. "There are a lot of people with a lot of money who want to invest. There are not as many properties as you would expect to be in the marketplace.”

Mid- and high-rise apartment sales pulled down cap rates 75 basis points, while cap rates for garden properties fell 10 basis points. Cap rates in primary market fell 40 basis points to 6.2 percent, while cap rates in smaller markets were about 7.5 percent.

“The buyer’s side interest is overwhelming,” says Patton Jones, a principal in the Austin/San Antonio office of Apartment Realty Advisors. “We’re seeing 30 and 40 offers. The level of [quality] properties on the market is still very low.”

But Thypin says to be wary of making generalizations that cap rates are falling dramatically across the board. “There’s a real two-tiered market because of the higher-quality assets, whether its quality of the asset itself or the quality of the market is getting bid up,” Thypin says. “So pricing may be look like it’s increasing, but that’s because there are fewer transactions happening. For those transactions that are happening, a higher proportion of them are primary assets.”

And, of course, primary assets sell for higher prices. That’s created a concern among some that the market is getting overheated for those trophy properties.

“You have definitely had a massive sea change in buyer underwriting criteria and buyer’s psychology in the last four to five months,” Campo says. “At the end of the year, people were holding back and waiting for bargains. Now they’re buying because they don’t think there will be bargains. I’m not sold on that yet. There are still a substantial number of properties in trouble that haven’t been brought to market or pushed out by banks."

And those properties could drive down values in some markets, but no one really knows for sure. All anyone does know is that after a morbid 2009, falling cap rates, increased investor demand, and the possibility of more distress, we could still make the last three quarters of 2009 interesting for the apartment transaction market.