It was the year of the apartment transaction resurgence, and 2010 ended with a bang with $6.1 billion sold in December, making it the most active month for sales since October 2007 (when Denver-based Archstone was taken private), according to New York-based Real Capital Analytics (RCA). Overall, the commercial research group said that sales of significant apartment properties jumped to $33.7 billion in 2010, which was an astounding 96 percent jump over 2009.
“It’s apparent that 2009 was the bottom,” says Gene Berman, senior vice president and managing director at Encino, Calif.,-based Marcus & Millichap. “At the end of 2008 and into 2009, we couldn’t give away $10 million-plus assets. But, within in the blink of an eye, these have become the darlings of the marketplace.”
Atlanta-based brokerage firm Apartment Realty Advisors (ARA) also saw its volume increase in 2010, rising 50 percent. Like RCA, it saw a strong second half. “The [increase in] rent projections became reality,” says Gary Kachadurian, ARA’s chairman. “Nobody would buy on projections and it was harder to put a deal together.”
During that period in the beginning of the year, it was the trophy assets (being bought by institutions) leading the sales wave, but in the fourth quarter almost 25% of assets traded were in tertiary markets or were troubled properties. Overall distressed sales totaled $7.8 billion in 2010, which was 23% of all volume. The volume of distressed sales increased throughout the year, hitting $3.0 billion in the fourth quarter.
“A lot of banks and servicers wanted to close those deals by year end,” says Rue J. Bax, vice president of Orion Investment Real Estate Solutions, a brokerage firm based in Scottsdale, Az.
RCA also saw the return of portfolio activity and larger buys. Portfolio sales tripled to $4.8 billion in 2010, while 37 properties above $100 million sold (in 2009 only two sold). RCA reported that 2,100 apartments, overall, sold last year, which was 32% year-over-year increase.
Mid- and high-rise apartments saw transactions increase for eight consecutive quarters to $5.3 billion in the first quarter (putting them at 2005 to 2007 levels). The $13.9 billion of mid and high rise sales (680 properties) was 184% increase over 2009. Garden sales jumped 63% in 2010 to $19.4 billion. Offerings in both categories both went up.
“Throughout 2008 to 2010 the offerings were falling, but they’ve gone up in the past couple of quarters,” says Ben Thypin, senior market analyst at RCA. “I think that bodes well for the future.”
The Cap Rate Fall
In its RCA commented that cap rates were on par with the last decade and transaction volume had returned to pre-2005 norms—before the condo conversion and REIT privatization frenzy. In the fourth quarter of 2009, cap rates began falling and moved little in 2010, ending the year at 6.7%.The top quartile of assets, however, fell 75 basis points to 5.5% in the third of fourth quarters.
Average cap rates in Manhattan, DC, San Francisco, and Los Angeles, approached 5.0% and Chicago, Seattle, Charlotte, Houston, and Raleigh/Durham saw deals trade at sub-6.0% cap rates.
This cap rate compression has led to some concern that prices are pushing unsustainable levels, but Berman notes one difference between now and 2005. “There is a lot more equity going into deals,” he says.
In primary markets, cap rates fell below 6.0% for the first time since early 2008 and are within striking distance of their 2006 low. In 2010, cap rates in secondary and tertiary markets also started to fall.
“The pricing bubble in the primary market hasn’t really bled over to these other markets,” Thypin says. “That may occur. It’s a fact of real estate that people want these assets in primary markets. They’re getting outbid. So they move to a secondary market. Other people do the same thing as those [primary market] prices get pushed up.”
The markets with the most sales volume were Manhattan, Los Angeles, Chicago, the Washington metro area, and Dallas. St. Louis and San Jose (which moved from 21 to 10 on the sales list) saw the biggest improvement in sales. In all, RCA says 27 of
the 40 most active markets at least doubling in volume from 2009. Seven saw their sales double during the year, including secondary markets like Austin, St Louis, Hawaii and Nashville. “People were definitely venturing out of the primary markets, specifically out of necessity,” Thypin says. “There wasn’t enough [to buy].”