The increases in sales just keep coming. Sales volume rose 63 percent to a total of $8.5 billion from the second to third quarter of the year, according to Real Capital Analytics (RCA). That’s the biggest jump in the past five years. Even more impressive: It’s a 130 percent jump over the third quarter of 2009.

Still, there’s one caveat. While sales volume rose 63 percent, the number of transactions only rose 5 percent, meaning deal size played a huge role in the transaction numbers. So far, $18.5 billion of apartments sold this year. That’s almost double the volume of the first nine months of 2009, but the number of properties sold only represented a 31 percent increase.

“A lot of the assets that sold are of higher quality,” says Ben Thypin, senior market analyst at RCA. “That’s why the jump in volume is bigger than the jump in count.”

Cap Rate Conundrum

The volume increase isn't surprising if you look at cap rates for garden apartments, which fell 55 basis points over the past year, according to RCA. Mid- and high-rise buildings actually saw their cap rates rise because of some recent transactions in higher cap rate, distressed markets. For the top 25 percent of properties, cap rates are down to 5 percent, which is a decrease of 75 basis points or more this year.

RCA says that traditionally strong markets such as Washington, D.C., and New York City, as well as formerly struggling markets such as Palm Beach, Fla., Orlando, and San Diego, have led the resurgence, Meanwhile, the Midwest, Portland, Ore., Northern New Jersey, and Richmond, Va., saw declines this year. REITs and equity funds were the heaviest buyers, while institutional investors and equity funds were the biggest sellers.

“These deals are being bought by very credit worthy buyers,” Thypin says. “They’re able to secure cheap financing.”

Robust Finish

Though the third quarter was strong, RCA thinks the fourth quarter could be even better. Already, $4.7 billion in apartment sales have closed or are under contract. New offerings of apartment product increased 40 percent in the third quarter to $10.3 billion (which is double the cost of a year ago).

That isn’t a surprise to Haendel St. Juste, an analyst with Keefe, Bruyette & Woods (KBW), an investment banking and security brokerage firm based in New York, who says brokers have been a lot busier offering opinions of value. “Brokers are saying they’re pretty busy,” he says. “The year-end tends to be a busy time for transaction.”

RCA says these new fourth quarter offerings may be a little more realistic that past properties with cap rates on both garden and mid/high-rise properties higher than closed transactions in the second and third quarters.

But others think that in good markets, debt from Fannie Mae and Freddie Mac, which was at about 3.85 percent for 10 years, means cap rates will go lower. “That will encourage cap rates to go further,” said Alexander Goldfarb, associate director of equity research of REITs for New York-based Sandler O’Neill + Partners.

Even with low cap rates, Goldfarb sees competition for these assets. “With treasuries at 2.5 percent, everyone wants yield,” Goldfarb says. “Commercial real estate, particularly apartments, showed itself to do well.”

But RCA doesn’t see a lot of distress coming online. In fact, troubled offerings have been declining each quarter this year, coming in at $12.3 billion for the first nine months of 2010. That means distress will probably come in at half of last year’s $30 billion. In fact, RCA says only $600 million was added to the pool of troubled apartment properties last quarter. “It’s not so much that there is a lot being resolved,” Thypin says. “It’s more that less is being added."