A dearth of quality assets is fueling cap rate compression in many major markets as investors line up to bid on the cream of the crop.

Though fewer multifamily trades are getting done overall, many of the deals that are closing are trading at aggressive prices. The pace of multifamily transactions dipped in June, to about $880 million, according to preliminary data from market-research firm Real Capital Analytics. In contrast, about $2 billion in multifamily trades occurred in January, the top month so far this year.

Indeed, demand far outpaces supply as many opportunity funds continue to wait for the right time to strike. But that dynamic may soon change. Fueled by the aggressive pricing on high-quality assets, many owners are now preparing their listings for the fall season.

“Buyers are lined up around the corner; there just haven’t been enough willing sellers,” says Dan Fasulo, managing director of New York-based Real Capital Analytics. “Some of the numbers from recent deals are not only surprising some investors, but in my opinion, it’s going to trigger a wave of new offerings after Labor Day.”

Frustration Abounds
Investor frustration at the volume and quality of assets was the key takeaway from the recently released Korpacz Investor Survey from PricewaterhouseCoopers (PwC), which polls about 130 real estate equity investors. The survey found that multifamily cap rates decreased by about 17 basis points in the second quarter, to 7.68 percent nationally. But that compression is mainly due to the fact that, of the few trades happening today, many are for high-quality assets.

“Investors are frustrated because they’re searching the core assets and can’t find what they’re looking for,” says Amy Olson, senior editor of the survey at New York-based PwC's Real Estate Business Advisory Services. “Right now, looking at the pipelines, the number of quality assets appears to be limited.”

Investors have mixed feelings about where cap rates will head in the second half, though. About 33 percent expect cap rates to hold steady, while most (nearly 43 percent) expect cap rates to rise as more lenders seek resolution for troubled properties. “Those investors that expect cap rates to rise think that a greater proportion of distressed assets will trade in the second half, in a market-clearing process,” Olson says.

Small and Large
For the most part, smaller properties have been leading the way. There were at least seven trades in June at 6 percent cap rates or less, the same tally as May. But of those sub-6 percent deals in June, only one was for a deal above $4.5 million: a $32.3 million purchase of the 202-unit Desert Parks Vista, in Scottsdale, Ariz., purchased by Passco Cos. from PB Bell & Associates.

One large trade may be on the immediate horizon, as AIG is looking to sell its equity stake in a 17,000-unit portfolio it acquired with Morgan Properties in 2007. The companies paid $1.9 billion for the portfolio from Kushner Cos. in one of the largest transactions of the decade. But AIG is now trying to raise cash and has reportedly gone back to Kushner to see if the company would be interested in buying back the portfolio.
And GE Capital is also looking to reduce its $80 billion portfolio of real estate assets, with a goal of cutting its volume in half. Mike Neal, chief executive of GE Capital, recently said at an investor conference that the company is shifting away from ownership stakes and toward loans.

AIG’s disposition, as welll as GE’s plans, mirrors a trend that’s been gaining momentum in recent months. A shift in attitude during the second quarter has many large owners thinking that now might not be such a bad time to sell. “Institutions realize that the multifamily market is being propped up by Fannie and Freddie,” says Ben Thypin, a senior market analyst at Real Capital Analytics. “They’re probably more cognizant of that than others because they can most easily secure that financing. So, they’re looking to get out while the pricing is still good, especially for Class A assets.”