At $38.8 billion, the apartment sector’s deal volume in the third quarter grew only 7% year over year (YOY), the slowest quarterly rise in two years, according to the latest US Capital Trends report by Real Capital Analytics.
An Absence of “Megadeals”
RCA attributes this show of market weakness to the absence of entity-level transactions in Q3 2016, which sunk portfolio- and entity-level sales volume to $5.2 billion, a 41% YOY drop. Over the course of 2015, “megadeals” accounted for 27% of transaction activity, but this past quarter they made up only 14% of deal volume. In contrast, single-asset sales grew by 24% over the quarter, their highest jump in two years.
The decline in megadeals has affected overall deal volume for mid- and high-rise properties, which fell 6% YOY in the third quarter, to $11.3 billion. Portfolio- and entity-level sales fell 54% YOY, while single-asset sales rose 15%. “The pace of deal volume marks the strongest quarter for single-asset sales in the garden apartment sector historically,” RCA says in its report. “If historical patterns hold, we are due for a strong finish to 2016.” Mid- and high-rise cap rates stood at an average of 4.6% for the quarter.
Meanwhile, garden-style apartment deal volume rose 14% YOY, with a 28% increase in individual-asset volume and a 33% decrease in portfolio volume. Despite this decline, garden-style portfolio volume is still 28% ahead of 2015’s pace. “There is still a compelling case to place large amounts of capital into the subtype by way of these megadeals,” RCA says. Garden cap rates stood at an average of 5.6% this past quarter.
Market Investment Trends
Geographically, major-metropolitan investment volume is up 10% YOY, while tertiary markets are up 39%. Although secondary markets fell by 1% YOY, they still carry the highest transaction volume across market types, both in this past quarter and year to date.
Eighteen of the 25 most-active apartment markets year to date posted YOY increases in deal volume in Q3. Manhattan still tops the list, although its volume grew by only 2%, against 8% YOY growth in the first half of the year.
Las Vegas saw the highest rate of growth this past quarter, at 109% YOY, bringing the market into the top 25, at No. 21, while Boston fell 30% YOY, from No. 12 to No. 24, the highest rate of decline. “Supply concerns and the ability of tenants to continue to pay high rents are casting a pall over deal volume in [declining] markets,” RCA says.
Capital Flows
Private capital sources are skirting close to a supermajority of buyer activity in the apartment market this year, RCA notes, with 62% of all transaction activity, or $67.2 billion in acquisitions. However, with a concomitant $67.0 billion in disposition activity, private investors’ net positions have been relatively static.
Institutional/fund investors represent 26% of buyer activity so far this year, while REITs have represented the least amount of buyer activity and, indeed, have sold $8.3 billion more than they've acquired. This stems from a fall in REIT share prices in 2015, which led most of these companies to cut lower-quality assets from their portfolios. (RCA notes that REIT share prices are climbing again this year, though the research firm says some companies are working to increase the quality of their current portfolios instead of buying new assets.)
The third-largest investment group this year so far is cross-border investors, with 6% of all transaction activity. With an investment volume of $6.2 billion, international investors won’t reach last year’s volume of $19.6 billion, RCA predicts. Nonetheless, the report notes, international dispositions “have come in at a remarkably consistent pace since 2013,” and their net investments are still rising.
The Biggest and Best of 2016 YTD
So far this year, Starwood Capital Group is the top buyer of apartment properties, by both investment volume and properties bought, and Equity Residential is the top property seller by investment volume and properties sold. Both companies are far ahead of their second-place competition, with over $5 billion in properties bought and sold, respectively.
Starwood is the top apartment-property buyer in the Southwest, Southeast, and Mid-Atlantic. Elsewhere, Harrison Street RE Capital, the No. 2 property buyer by volume nationwide, is the top purchaser in the Midwest; Bascom Group, No. 7 nationwide, is the top buyer in the West; and Rockpoint Group, No. 16 overall, is the top buyer in the Northeast.
The top broker by apartment investment volume across both garden-style and mid-/high-rise properties to date in 2016 is CBRE, which has amassed an overall transaction volume exceeding $30 billion so far this year. CBRE is also the top apartment transaction broker by investment volume in every region except the West, where it is No. 2 after Marcus & Millichap. Marcus & Millichap has also brokered the most apartment properties so far this year across all styles.
The top three biggest individual apartment property deals in the third quarter of 2016 were:
- The sale of 463-unit Indigo Apartment Homes in Redwood City, Calif., from Pauls Corp. Realty and Mount Kellett to Aimco, for $320 million;
- The sale of 1,790-unit Savoy Park in New York City from L&M Development Partners and Citigroup to Fairstead Capital, for $315 million; and
- The sale of the 1,523-unit Breakers Resort in Denver from Bascom Group and Koelbel & Co. to Pensam Residential and Wafra Capital Partners, for $262.5 million.
The biggest portfolio deal in Q3 was the purchase of 24 apartment properties from DRA Advisors by Strata Equity Group, for $720 million.
