The REITs are back.

With interest rates rising and cap rates stable, the well-funded institutional owners and public apartment firms have returned to the buying arena as leverage buyers find themselves financially pressured and pushed to the side.

It represents quite the switch in the multifamily deal-making environment, where last year public apartment REITs such as AvalonBay Communities in Alexandria, Va., went so far as to establish their own funds to compete more effectively against private buyers.

Though AvalonBay bought Versailles at Aberdeen Station in Aberdeen, N.J., for its fund, it should be able to buy more on balance sheet now.
AvalonBay Communities Though AvalonBay bought Versailles at Aberdeen Station in Aberdeen, N.J., for its fund, it should be able to buy more on balance sheet now.

"[REITs] have been sitting on the sidelines because they've been beaten up by the leverage buyer," says Daniel N. Kaplan, chief investment officer for Fowler Property Acquisitions, an owner and operator of apartments in San Francisco. "But right now, for the leverage buyer, it doesn't make a lot of sense [to buy apartments]."

Why? Because cap rates have not followed interest rates upwards, leaving leverage buyers facing the prospect of losing money until cap rates inch up.

So REITs and institutions (which have cash to spend and don't have to rely on leverage) have jumped back into the buying arena because they can make the numbers work. Once cap rates follow interest rates up, this trend could change. But no one knows when that might occur.