
If 2018’s good fortune is any indication, the new year looks bright for apartment developers and investors hoping to capitalize on multifamily assets in 2019.
Deals were up and investment activity was strong last year—in fact, the third quarter of 2018 set records for transaction volume. Multifamily transaction activity was up 14.7% year to date in Q3 2018, reaching $115.7 billion, according to JLL’s Multifamily Investment Outlook report for that quarter. This surge in activity can be partly attributed to portfolio transactions, the real estate investment management company says, which jumped 74.3% from the previous quarter.
At the same time, deal volume for -individual apartment assets alone totaled $91.4 billion through the third quarter of last year—a record level for the first three quarters of any year, according to the U.S. Capital Trends Apartment Report from real estate data firm Real Capital Analytics (RCA).
With large portfolio transactions coming back into focus after recent years of volatility and big individual property sales increasing, the year’s robust deal volume is expected to remain strong through 2019.
The question is, will 2018’s impressive success in the student housing, single-asset, and value-add categories spill over into 2019?
Head of the Class
2018’s transaction surge was driven in large part by increased interest in the student housing sector, which accounted for 17% of all deal activity in the third quarter, compared with a consistent 4% over the past 13 years, according to RCA.
The spike in these deals was led by the nation’s largest apartment operator, Charleston, S.C.–based Greystar. The firm’s $4.6 billion acquisition of Memphis, Tenn.–based student housing developer EdR in September not only ranked as the second-largest deal of the year as of press time in mid-December but also made Greystar the country’s second-largest operator of student housing.
With the sale, Greystar absorbs 14,857 units in the EdR student housing portfolio of 75 communities in 25 states among 50 universities. Greystar already had a strong position in student housing, but it was mostly in international markets, including Spain and the United Kingdom, and the company was looking to expand its footprint in the domestic sector, which Kevin Kaberna, executive director of investment management at Greystar, says positions the giant well for growth, especially since the sector is strong.
“Student housing is stable and recession resilient, and there continues to be healthy demand supported by secular trends, including domestic enrollment fueled by the increasing importance of having a college degree and international student enrollment growth in the U.S.,” says Kaberna. “Additionally, we feel there’s significant opportunity to modernize the existing student stock, and we’re optimistic about the positive trajectory in the capital markets, which highlights the continued institutionalization of the student housing asset class.”
With consistent, unwavering demand, the student housing sector is appealing to many owners and investors seeking long-term stability.
“There’s a demographic trend to help support student housing—we’re moving past the millennial generation and into Generation Z and the generation that will follow,” says Jim Costello, senior vice president at RCA. “The point is, you’re always going to have a large number of young folks and college-aged students looking to rent through the next 20 to 30 years. [Student housing] is a property type that will continue to face healthy organic demand.”
While an attractive investment, student housing does have its caveats, cautions Costello.
“One of the initial reactions [investors] have as they get into student housing is that it has a higher yield than comparable properties,” he says. “But some of the yield advantages for the sector have been squeezed away, and there has certainly been compression in the cap rates on student housing deals since the asset type became popular. With the higher yield [too] come additional management considerations that traditional apartment owners don’t have to deal with—like furnishing all the units, for example, or additional damage.”

Greystar recently completed the largest-ever single-asset student trade in the country with the sale of University View, a 1,573-bed community adjacent to the University of Maryland, for $235 million. The development consists of two high-rise buildings with 9,218 square feet of ground-floor retail space, and since purchasing the property in 2016, Greystar has upgraded it with extensive renovations to the units and all common areas, capitalizing on a value-add strategy. (As of mid-December, the buyer hadn’t been disclosed.)
Single Assets Soaring
Even without Greystar’s megaportfolio transaction, deal volume was still growing at a healthy pace last year, especially compared with 2017, when single-asset deal volume fell 5% year over year (YOY) in the third quarter, including a 16% YOY drop in September from 2016, according to RCA data. Based on the numbers available as of mid-December, the sale of individual apartment assets was on pace to set a record for 2018, RCA reports.
Large-ticket acquisitions spiked 83% in Q3 2018 from Q2 2018, with such transactions accounting for one-third of quarterly volumes, according to JLL. The uptick in single-asset sales can be traced to new types of investors emerging in the market.
“There have been so many new buyers coming into the market,” says Chris Espenshade, managing director and lead of Mid-Atlantic multifamily at JLL. “The number of individual buyers, families, offices, international players, or private equity groups who are investing in multifamily is going up exponentially.”
Private buyers, in particular, accounted for 67.4% of multifamily acquisitions year to date Q3, notes JLL. That share is up significantly from earlier in the cycle, in 2012, when private capital accounted for only 43.1% of acquisitions.
“Private groups that have sold off businesses can defer tax gains by investing in real estate, and many foreign investors have decided that the U.S. multifamily market is a great investment tool for their own portfolios,” Espenshade says. “If you rewind to two years ago, those players weren’t in the market. But while it’s increasing transaction volume, it’s also putting pricing pressure on institutions and REITs, which have always had the cheapest source of capital. Now, they’re competing against just a family that wants to buy an apartment building.”
That means the success of portfolio transactions may take a hit in the future.
“The new buyers in the market may not be able to buy an $800 million portfolio but certainly can buy a $100 million asset, so I think we’re going to see fewer portfolios come out in 2019,” says Espenshade. “Some sellers have realized there isn’t really a premium for doing a whole portfolio transaction, and they may in fact get their best price by offering smaller deals on an individual basis.”
Value-Add a Driving Force
Investors are also turning to value-add deals as a viable acquisition option with high returns. In fact, the value-add strategy may be one of the driving forces behind increased deal volume, making transactions possible where they might otherwise not come to fruition.
“Many of our borrowers have funds that have been raised because there are certain returns promised to investors. One of the only ways to really manufacture a more attractive return is to say you’re going to buy a property and improve its operations,” says Brendan Coleman, managing director and head of Walker & Dunlop’s Washington, D.C.–based debt and structured finance group. “Maybe on the surface, at first, a property may not seem like that great of an investment, but buyers know they can really grow the NOI [net operating income] even if they bought it at a low cap rate.”
Coleman says value-add deals are attractive because they’re a way to easily manufacture yield, though, he says, by their nature, they haven’t broken many records for high transaction volume.
“While it’s a really attractive product type, the buildings themselves are going to be older, sometimes distressed properties, so they tend to be much smaller deals when it comes to cost,” he explains. “It’s pretty hard to find a $100 million value-add deal for a 20-year-old or [older] building.”
Good to the Core
Coming into 2019, high-rise transactions are expected to continue to be hot. After notable declines in 2017, transaction activity for the product type increased 41.9% on an annual basis in 2018. JLL notes that high-rise development is booming, accounting for 26.2% of the current development pipeline. Until high-rise urban development subsides, the firm predicts the market is likely to see further narrowing in cap-rate spreads between garden-style and urban product. That trend may drive more investment in core-plus, rehab, and value-add deals as investors hunt for ways to increase their ROI.
Though deal volume increased for 2018 amid rising interest rates, RCA’s Costello predicts there might be challenges to the transaction landscape and cap-rate expansion as we move forward.
“Cap rates are low right now, and they continued to get lower in the third quarter, and everyone keeps asking me why we haven’t seen them go up yet,” he says. “If they go up, I think it might change the appetite of parties on both sides. Buyers will start to be a little more cautious and start asking for concessions, and sellers aren’t going to be as willing to make cuts. Buyers and sellers will move further apart from price expectations, and deal volume may suffer before anything else.”
As for what all this means for the new year, JLL predicts in its report that, due to the stronger-than-expected activity at the end of 2018, “full-year [2018] U.S. transaction volumes [are expected] to increase by more than 10.0%, followed by a 3% decrease in 2019.”
Time will tell what kind of impact last year’s stirring multifamily success will have on transaction volume in 2019.